Amy has been investing in stocks so she can accumulate sufficient money to purchase her own home. These savings are currently valued at $82,500. As recently as last month, her savings were worth in excess of $110,000. Today, Amy found the perfect house. She knows she can withdraw her savings to pay on this house and borrow the remaining balance from her father at zero percent interest. However, Amy is refusing now to buy any house until her savings increase in value back to their $110,000 previous valuation. Amy is displaying which one of the following behaviors?
A) Representativeness heuristic.
B) Loss aversion.
C) House money effect.
D) Under-confidence.
E) Confirmation bias.

Question

Quizplus · Accepted Answer

Amy's behavior is an example of loss aversion, which is the tendency to prefer avoiding losses to acquiring equivalent gains. She is hesitant to use her savings for a house purchase until they return to their previous higher value, indicating a stronger reaction to the loss in her investment value than to the potential gain or utility from buying the house.

Amy Has Been Investing in Stocks So She Can Accumulate