Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision:
A) is correct and shows a solid command of the nature of opportunity cost.
B) is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.
C) is incorrect because when the price of a stock falls, the law of demand states that he should buy more shares.
D) is incorrect because it treats the price of the shares as an explicit cost.

Question

Quizplus · Accepted Answer

Constantine's decision is based on the sunk cost fallacy. The original price he paid for the shares is irrelevant to the current market price and should not influence his decision to hold or sell the shares. He should instead evaluate the current market conditions and his future expectations for the stock to determine whether it is worth holding or selling.

Constantine Purchased 100 Shares of IBM Stock Several Years Ago