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xT Dan Ariely: Are we in co x G If you were the econom t/d/1veWSZMSMnz/SOkmFmZoVmTJjzGXvO51zmk4Y5WgrDOU/edit t+11+summer+2018+4+week.docx 54882 681106 Ho Homewe - Help Last edit was seconds ago 10 A G Homework Assignment #11 1. (3 points) Explain the diamond-water paradox. Can you think of other examples of this phenomenon? Explain. (3 points) What are the \"hot hand fallacy\" and the \"gambler\'s fallacy?\" Give an example of each. Which do you think is more likely to happen to you? Why? 2.

Solution

1. Diamond-Water paradox: According to the paradox, water which is an absolute necessity for life to exist costs nearly nothing when compared to a diamond, which hardly has any uses. The paradox is that how can a thing with so little demand be so expensive while another thing which is a necessity for life and has incredible high demand be dirt cheap. However, the solution to this paradox is to consider not only the demand but also the supply. Due to the huge supply of water, water stands to be cheap. On the other hand, with a very limited supply of diamonds, the price of diamonds stand to be very high. Another example like this maybe human labor. Farmers are very essential in providing us with food however, they recieve negligible amounts when compared to a popular celebrity who gives almost zero value to our lives.

2. Hot hand fallacy is an irrational belief in which if people win or lose several chance games in a row, they expect the streak to continue based on something other than pure probabilities. However, logically, no one has any reason to believe that the streak shall continue. Hence this is a fallacy. The gambler\'s fallacy is a similar fallacy wherin the participants believe that in a situation that has a pure random chance, the outcome can be affected by the previous outcomes. Example of hot hand fallacy is when a person makes a good trade in the stock market, he expects the streak to continue and expects he will profit everytime he trades Example of gambler\'s fallacy is the technical analysis in of stock prices where people study charts to decide a position based on the previous outcomes i.e. previous price movements.