In an analytical essay concerning behavioral economics, the author cites Daniel Kahneman's prospect theory to explain why investors hold losing stocks too long while selling winners prematurely. What is the author's purpose?
Answer and explanation
Correct answer: D. Grounding irrational investment tendencies in psychological loss aversion
- Step 1: Prospect theory posits that the pain of losing is psychologically twice as potent as the pleasure of gaining (loss aversion). Step 2. The author uses Kahneman's framework to explain why investors cling to losses. Answer: To ground irrational investment tendencies in the psychological principle of loss aversion. Why not the others: The author highlights irrational cognitive bias, not strict rationality.
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