We, human, have been claiming to be a rational being. We tend to think that we have calculated every risk and return before taking any decision (financially of course!). In fact, we are trap in those thoughts and act irrational instead. How so? You are to pick two (A or B) gambling choices.
#1
A: If head, you would receive $100. If tail, you would pay $50.
B: Forfeit the gamble and receive $20
#2
A: If head, you would receive $50. If tail, you would pay $100.
B: forfeit the gamble and pay $20.
Believe me, there are quite a few researcher that have used this experiment and they have consistently found remarkable insight out of it. Most of people would pick B for the first quiz and A for the second quiz.
Disposition theory by Daniel Kahneman is the answer! People tend to take safer choice when faced with a “sure-win” choice (#1: B) regardless how big the profit. In contrast, people tend to gamble when faced with a “sure-lose” choice (#2: B).
Let me give you time to swallow the bitter pill and after that allow me to humbly congratulate you on becoming a cold-blooded investor. Proficiat!
P.S: It would help if someone can give me the mathematics explanation on both quizes :D
