Wilbur Smith,a Financial Advisor,recently Told One of His Clients: 'The

question 195

Multiple Choice

Wilbur Smith,a financial advisor,recently told one of his clients: 'The biggest mistake you can make is to hold onto shares for too long in order to avoid a loss.Let's say you bought a share 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 keep the shares,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 Smith's advice?

• A) People sometimes buy shares because other people are buying them or they want to appear to be fashionable.
• B) People sometimes make mistakes when they buy shares because of the endowment effect.
• C) People sometimes make mistakes when they buy shares 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 fall in the value of the shares by $10 is a sunk cost.

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