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 5 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) Disposition effect B) Affect heuristic C) Gambler's fallacy D) House money E) Get-evenitis

Question

Korin

Business

22 December, 21:17

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 5 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) Disposition effect B) Affect heuristic C) Gambler's fallacy D) House money E) Get-evenitis

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Andreas Salinas · Answer 1

D) House money

Explanation:

The house money effect is the act of investors taking greater risks in investing money acquired as profit from other investments, or in this case, the lottery. The explanation is that investors feel more comfortable investing money they didn't previously had by thinking that if the investment doesn't pay off they wouldn't be "really losing money" when comparing to where they started.