Question

Six months after starting a quilting business with a partner, Penny finds that actual revenues are significantly lower than projected. The future does not look promising. To alleviate the situation, Penny invests another $50,000 from her savings into the venture. Penny may be suffering from:

Answer 1

Answer:

escalation of commitment

Explanation:

Penny invest into the business additional funds ignoring the expected outcome of the business (the future returns are not expected to increase)

Penny is not doing the proper analysis of the past six month

The invested funds, time and other resources should not be considered they are sunk cost. The 50,000 will increase the losses not cut them as the return are not going to improve. Additional funds should be invested when there is a financial need due to other project which required more lverage and not to make up for revenues falling behind budget

Penny avoids to acknowle the true fact of the business.

Answer 2

Answer: escalation of commitment (sunk cost effect)

Explanation: The escalation of commitment is also known as sunk cost effect or commitment bias and its the typical behavior pattern that Penny is exhibiting. Escalation of commitment occurs when an individual or group continues to dedicate resources (time, energy, money) to a failing course of action. This happens usually because we want to appear consistent or waiting for a turnaround that might not be evident. Penny needs to apply good decision-making to her actions by gathering and analyzing applicable information concerning her investment, prior and after, and then using it to identify the best course of action to take.