Question

Vinita buys a stock assuming that she can make profit out of it. Shortly thereafter, the stock value drops and she loses money. Her financial planner thinks the stock value will drop further and advises her to sell the stock. However, the market value has dropped so much already that Vinita believes it is due to rebound; she doesn't want to sell at the lowest point and lose money. She holds onto the stock, hoping to regain her loss. Instead, she loses more money. This phenomenon is referred to as

a.) intuitive decision making.
b.) rational decision making.
c.) representativeness heuristic.
d.) escalation of commitment.

Answer 1

Vinita's situation of continuing to hold a losing stock is an instance of 'escalation of commitment' and is influenced by factors such as previous investment and the hope of regaining losses, rather than rational analysis.

Step-by-step explanation:

Vinita's decision to hold onto a stock despite consistent losses is an example of the escalation of commitment. This behavior is characterized by an individual's choice to continue to invest in a decision despite new evidence suggesting it is time to stop. It is a common psychological phenomenon where people justify increased investment in a decision, based on the cumulative prior investment, despite new evidence suggesting that the cost of continuing the decision outweighs the expected benefit.

Contrary to rational decision making, where decisions are made based on logical, systematic evaluation of the available information, escalation of commitment can be influenced by emotional factors, such as the desire to not admit failure or the hope to recover past losses. Additionally, it reflects a case of the sunk cost fallacy, where one continues a behavior or endeavor as a result of previously invested resources.