Asked by Waleed Abdullah on May 04, 2024
Verified
Recently, a neighbor you have known for years won a lottery and received a $250,000 prize. This neighbor decided to invest all of his winnings in a new business venture that he knew only had a five percent chance of success. Previous to this, the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week. Which one of the following behaviors most applies to your neighbor's decision to invest in this business venture now?
A) Over-optimism.
B) Affect heuristic.
C) Loss aversion.
D) House money.
E) False fallacy.
House Money Effect
The tendency of individuals to take higher risks when dealing with profits from previous bets or investments, as if playing with "house money."
Lottery
A form of gambling that involves drawing numbers at random for a prize, with varying rules and structures depending on the type.
Business Venture
An entrepreneurial enterprise or new business that is undertaken with the expectation and plan of achieving financial gains.
- Expound on the criticality and resultant effects of risk-oriented actions in financial decision-making.
Verified Answer
Learning Objectives
- Expound on the criticality and resultant effects of risk-oriented actions in financial decision-making.
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