Question
Suppose that Mr. K buys 1,000 shares in a software company at 25 / share. The company is currently attracting considerable media attention for its
Suppose that Mr. K buys 1,000 shares in a software company at 25 / share. The company is currently attracting considerable media attention for its new accounting software, that is expected to become the industry standard, with considerable improvements in both efficiency and ease of use. Mr. K also has considerable expertise in evaluating accounting software options. He read all of the software company's advance information on the new package and carried out his own extensive research prior to buying the shares. Within two weeks of his purchase, the shares are up to 30, and Mr. K is tempted to sell them. He decides to hold on, however, as the industry excitement about the new software is increasing as the release date approaches. The shares continue to appreciate until there begin to be whispers about a serious bug in the software. In the weeks coming up to the release date, the company's share price becomes increasingly volatile, as rumours and counter-rumours abound. The company's share price falls below 30, and then below 25. Occasionally some positive stories on social media cause brief bounces in the price, but Mr. K is becoming increasingly pessimistic about the product. The shares are currently trading at 20. Although Mr. K now believes that the product will fail, he decides to hold onto the shares in the hope that a new rumour will bounce the price up to 25 so that he can sell. Which Prospect Theory feature best explains Mr. K's behaviour during the time that he has owned these shares? A) Loss aversion B) Risk seeking over losses C) Risk aversion over gains
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