Question

Please identify the mistake made in regard to economic decision-making in the following scenario. Alexander is heavily invested in the stock of Nortel, a telecommunications giant. However, Nortel has been in steady decline, and even though all signs point to the fact that Nortel will likely go bankrupt, Alexander holds onto his stocks, unwilling to sell unless he makes back at least the money he invested. Alexander's mistake is an example of Jim is washing his laundry and, as he checks his pockets, finds an unexpected windfall of $50. Elated because it is $50 more than he had before.

Answer 1

Questions is incomplete. It's last line is: *Jim's decided to get dinner worth that amount*

Answer:

• Alexander's Loss Aversion  
• Jim's Mental accounting.

Explanation:

Loss Aversion: Some people are always frightened of losing and always try to avoid it by making irrational decisions which make their sufferings worst. This scenario is the example of loss aversion where the focus on gains is lost but all they see are failures.

• It is a common decision-making mistake people go for during which they will not leave until the loss is not realized

In Alexander's case: He is trying to avoid losses and hoping that his investment would be saved although, the company he has invested in will soon go bankrupt. He should realize that before it gets too late and end up his sufferings.

Mental Accounting: It refers to the spending behavior by which people categorize the money they have often without logic.

For example: A person monthly earning is  $40, but suppose he gets only $30 for whatever reason, and he has to pay rent which is $35. So he is 5 dollars short but he had decided that he will eat chocolate worth $5 next month, so he will go for that chocolate even if he is short.

In Jim's case: He got $50 which he didn't have before, he could have used it for better purposes, than going to a dinner. Because he didn't have that amount before that.