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 five 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) Over-optimism.
B) Affect heuristic.
C) Loss aversion.
D) House money.
E) False fallacy.

Question

Quizplus · Accepted Answer

The "house money effect" refers to the tendency of individuals to be more willing to take risks with money that they perceive as being won or received unexpectedly, as opposed to their own hard-earned money. In this scenario, the neighbor is more willing to invest in a high-risk business venture with his lottery winnings, which aligns with the house money effect.

Recently, a Neighbor You Have Known for Years Won a Lottery