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 neighbor's decision to invest all of his lottery winnings in a business venture that he previously considered too risky can be attributed to the "house money" effect. This refers to the tendency for people to take more financial risks when they perceive the money they are gambling with as "house money," or winnings that are not part of their regular income or savings. In this case, the neighbor may feel more comfortable taking a risk because he is using money that he did not earn through his normal means of income.

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