Benny recently started trading stocks with an easy-to-use trading app, Lotter-E, but things have not gone well. He lost $120 in the first month. Determined to avoid failure in his investments, Benny transfers another $100 into his Lotter-E account and buys additional stock while prices are low. "When they go back up, I'll make my money back," he reasons. Benny is suffering from:

Question

Benny recently started trading stocks with an easy-to-use trading app, Lotter-E, but things have not gone well.  He lost $120 in the first month.  Determined to avoid failure in his investments, Benny transfers another $100 into his Lotter-E account and buys additional stock while prices are low. "When they go back up, I'll make my money back," he reasons.  Benny is suffering from:

BlackTom AI · Accepted Answer

When evaluating Benny's situation, we consider how each cognitive bias could apply to his behavior.
Option 1: Framing bias. This occurs when the way information is presented (framed) influences decisions. In Benny's case, the narrative focuses on losses and future recovery, but framing bias would be about presentation of information rather than the decision to invest more after losses. So this is not the best fit.
Option 2: Anchoring bias. This is the tendency to rely too heavily on the first piece of information encountered (the anchor) when making decisions. Benny isn’t fixated on an initial price or reference point in a way that guides a continuing investment based on that anchor; rather, he is motivated by recouping losses, which aligns more with other biases. This makes anchoring less accurate here.
Option 3: Availability bias. This bias leads people to overestimate the likelihood of events that are more memorable or recent. Benny’s reasoning to invest more is not driven by a recent vivid example of a similar success or loss occurring in memory; it’s a general hope to recover losses. Therefore, availability bias does not best describe his action.
Option 4: Sunk-cost bias. This occurs when individuals continue a behavior or investment because of money or resources already spent, wanting to avoid being “wasting” the prior investment rather than based on future prospects. Benny pours another $100 into the account after losing $120, thinking he’ll get it back when prices rise, which reflects the classic impulse to try to justify past losses instead of reassessing the current situation. This matches sunk-cost reasoning well.
In summary, the most fitting description among the options is sunk-cost bias, as Benny is continuing to invest to justify the money already lost rather than making an independent assessment of future risk and potential return. The other biases don’t map as directly to the described behavior, since they involve framing effects, reliance on initial anchors, or the prominence of readily available memories rather than the compulsion to recover prior losses.

MGT 3030-005 Spring 2025 Test 1

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