This is the final exam for Loss Aversion & Prospect Theory. It pulls together the whole arc: the favorable coin flip you refuse, the loss-aversion coefficient of roughly 2.25, the difference between loss aversion and plain risk aversion, the movable reference point, the kinked S-shaped value function, framing effects and the Asian-disease problem, the endowment effect, status-quo bias, the sunk-cost fallacy, probability weighting, and the debiasing craft that defends you from all of it. Take your time and reason each one through — several look obvious until you spot the trap: anchoring on final wealth, forgetting who set your reference point, or treating one bet in isolation when you should be aggregating. And keep the honest caveat in mind: the asymmetry is wisdom for ruinous, irreversible losses and a costly bias for small recoverable ones.
How this exam works
Read carefully — this exam is final. Each question appears one at a time. Once you submit an answer it is locked for good: there’s no going back, no retry, and no restart. Your score is hidden until the end, where you’ll see a pass/fail verdict. The pass mark is 70%. A few questions ask you to select all correct answers.
I flip a fair coin: heads you win 110, tails you lose 100. On average the bet pays +5 per flip, yet most people refuse it. What does refusing reveal?
Select an answer to continue.
Course Recap
Big picture
Loss Aversion & Prospect Theory, in one picture
- Loss Aversion & Prospect Theory
- The asymmetry
- Losses loom about 2.25x larger than equal gains — so a favorable coin flip (+5 EV) gets refused; this is loss aversion, not plain risk aversion, and it can make us risk-seeking
- Reference points & value function
- We judge outcomes as gains or losses from a movable baseline, not as final wealth; the value function is concave for gains, convex for losses, steeper on the loss side, with a kink at the origin
- Framing
- The same outcomes reworded as gains vs. losses reverse our choices (Asian-disease: sure 200 saved vs. gamble); framing is the cheapest incentive — it changes behavior without changing payoffs
- Endowment, status-quo & probability weighting
- We overvalue what we own (the mug: sellers want ~2x buyers pay), cling to defaults (opt-out organ donation), chase sunk costs, and overweight tiny odds — so we buy both lottery tickets and insurance
- Debiasing
- Widen the frame and aggregate, interrogate the reference point, reframe both ways, pre-commit to rules — but honor the asymmetry for ruinous, irreversible losses (margin of safety)
- The asymmetry
Key takeaways
The whole course in one breath: losses hurt about twice as much as equal gains (the loss-aversion coefficient, roughly 2.25), and we judge outcomes as gains and losses from a movable reference point, not as final wealth. That single asymmetry runs through everything. The value function — concave for gains, convex for losses, steeper on the loss side — makes us cautious with gains and reckless with losses in the same breath, and it is loss aversion, not plain risk aversion (it can make us risk-seeking). Whoever controls the frame controls your reference point, so the same medical program flips from popular to unpopular on wording alone — framing is the cheapest incentive there is. The asymmetry also explains why we overvalue what we own (endowment effect), park on defaults (status-quo bias), chase sunk costs, and both gamble and insure (probability weighting of tiny odds). The defense is real craft: widen the frame and aggregate, interrogate your reference point (“did someone else choose it?”), reframe both ways, and pre-commit to rules. And the honest caveat: loss aversion is wisdom for ruinous, irreversible losses — a margin of safety — and a costly bias for the small, recoverable ones. Catch the asymmetry in the act, and you can out-think it.