Wilbur Rickhiser, a financial advisor, recently told one of his clients: "The biggest mistake you can make is to hold onto a stock for too long in order to avoid a loss.Let's say you bought a stock for $50 per share but that six months later the price fell to $40 after a poor earnings report.Many of my clients in this situation will hold the stock, hoping the price will later rise above $50.In most cases like this the price does not rise and may even fall.You must know when to cut your losses." Which of the following is the best explanation for Rickhiser's advice?
A)People sometimes buy stocks because other people are buying them or they want to appear to be fashionable.
B)People sometimes make mistakes when they buy stocks because of the endowment effect.
C)People sometimes make mistakes when they buy stocks or when they buy goods and services: they ignore the monetary opportunity costs of their choices.
D)People often fail to ignore the sunk costs of their decisions. The cost of the stock bought at $50 per share is a sunk cost.

Question

Quizplus · Accepted Answer

Rickhiser's advice is based on the concept of sunk costs, which are costs that have already been incurred and cannot be recovered. Holding onto a stock to avoid realizing a loss is a common mistake because the initial purchase price is a sunk cost and should not influence current investment decisions.

Wilbur Rickhiser, a Financial Advisor, Recently Told One of His