Skip to content

NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Behavioural Finance

In prospect theory by Kahneman and Tversky, which statement about the value function is correct?

The value function is measured relative to a reference point and is steeper for losses than for gains, which captures loss aversion. It is concave for gains and convex for losses, unlike expected utility theory, which uses final wealth levels.

  1. AIt is steeper for losses than for gains, reflecting loss aversion, and is defined over gains and losses relative to a reference pointCorrect
  2. BIt is concave for losses and convex for gains, and defined over final wealth
  3. CIt is a straight line, treating gains and losses of equal size symmetrically
  4. DIt is defined over absolute wealth levels and is steepest for large gains

Explanation

The value function is defined on changes from a reference point, concave for gains, convex for losses, and steeper for losses, so a loss hurts more than an equal gain pleases. The other options reverse the shape, ignore the reference point, or make it linear.

Did you get it right without looking?

One question tells you little. A timed set on Basics of Behavioural Finance shows your real accuracy, how long you take and where you lose marks.

Practise Basics of Behavioural FinanceFree diagnostic mock

More Basics of Behavioural Finance questions