Memo 1 Problem 5 is asking the question that if a woman received a bank statement saying her wealth went from 4M to 3M, and another woman’s wealth went from 1M to 1.1M who is more satisfied with their bank statement and who is happier today? Kahneman is presenting that people think that the woman who receives the bank statement saying her wealth went from 1M to 1.1M is both happier today and satisfied with her statement. The reason people side with this other than the girl who clearly has more money is because people feel the pain of loss. Bernoulli’s believes that people live in the long run so therefore they should want the person with the larger bank statement. He believes this because even though they lost 1M this month they have a better chance of also gaining a much larger some in the future. In the long run for the less wealthy woman, she may be gaining money but at a very slow rate which does appeal to people. You can see that people behave differently than that of classical theory because regular people prefer to be the woman going from 1M to 1.1M rather than the woman going from 4M to 3M. This is because real people feel pain from loses which is not seen in the classical theory. In the classical theory people should want to be the woman who goes from 4M to 3M because although she loses money she still has a higher amount of utils. Classical theory assumes that people have diminishing marginal returns when it comes to money. So in the case of problem 5,assuming both woman have the same utility per dollar function, the woman who falls from 4M to 3M does not lose many utils because at her area on the map, losing that much money isn't going to change her utility by much. On the other hand the woman going from 1M to 1.1M is raising her utils by a more significant amount but at the end of the day when a classical economist looks at the utils of both woman he will agree that the woman with 3M currently will still have more utils that that of the woman with 1.1M. The puzzle in this question is that even though people want to have that large amount of money they don't want to deal with the pain of knowing they lost that 1M dollars. That is what classical theory does not capture. It cant predict what people are feeling when they lose that money. My real life situation would be to imagine two men, one man signs a contract with a professional baseball team for 30M dollars but fails a physical so his actual contract is only 15M dollars. While the other man signs a rookie contract raising his pay from 20k to 450k dollars. Which man is happier with his contract that he sign? Which man is Happier at the end of the day? This happens all the time in baseball when kids are getting drafted and teams are trying to sign players. In real life the kid who is signing a rookie contract is much happier with his life than that of the player who failed his psychical. This is because the man who failed his psychical is feeling the pain of losing that 15M dollars while the kid who signed a rookie contact feels the happiness of just raising his income. Classical economics doesn't realize the pain that the man feels and that is why there is a difference between classical economics and actual reality.