Question

Which type of situation best represents "gambling for redemption"?

a. A firm on the verge of bankruptcy invests all available funds in a high-risk, low-NPV project in order to attempt to save itself.
b. A firm risks its reputation on the introduction of a revolutionary product.
c. The firm's treasurer invests all of its cash in a single money market mutual fund.
d. A manager decides to invest in a single new product instead of three different products.

Answer 1

The scenario of a firm investing all its funds in a high-risk, low-NPV project to avoid bankruptcy best represents 'gambling for redemption'.

Step-by-step explanation:

The type of situation that best represents "gambling for redemption" is a. A firm on the verge of bankruptcy invests all available funds in a high-risk, low-NPV project in order to attempt to save itself. This scenario illustrates a desperate last-ditch effort to avoid collapse by betting everything on a single, risky initiative that has a low expected net present value (NPV), signaling that the firm's managers are willing to take extreme risks in the hope, but not the certainty, of a turnaround.

Firms in healthier financial conditions typically manage risk better by diversifying their investments and not putting all their funds into one high-risk project. This is distinct from the other options in the question which relate to strategy and management decisions rather than the dire financial gamble that gambling for redemption implies.