A Fair Number of People Buy Expensive Gym Memberships to Commit

question 131

Multiple Choice

A fair number of people buy expensive gym memberships to commit themselves to exercising.Yet,data from health clubs show that many do not follow through with their intentions and end up losing money on their membership contracts.Which of the following could explain this behavior?

• A) People have a tendency to pursue immediate gratification in a way that their 'long-run selves' do not appreciate (quoted from Ted O'Donoghue and Matthew Rabin, "Choice and Procrastination," Quarterly Journal of Economics, February 2001, pp. 125-26.)
• B) People tend to be overly optimistic about their future behavior so much so that after making an expensive investment in the membership, they overate the dividends they expect to reap.
• C) People fail to ignore the sunk cost of a gym membership when making the purchase.
• D) People realize after the fact that they have made a mistake but unfortunately memberships are often not transferable and not refundable.

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Definitions:

Straight Debt

Traditional corporate bonds that have a fixed interest rate and mature on a specific date, without any conversion or exchange rights into other forms of securities.

At-The-Money Call

An at-the-money call option is a type of option where the strike price is equal to the current price of the underlying asset.

Long Stock

Holding a stock position with the expectation that it will increase in value over time.

Net Payoff

The actual gain or loss experienced after executing a financial transaction, taking into account all costs involved.