Question

Chapter 1 discusses ten principles that form the foundation of personal finance. The "sunk cost effect" is an example of this principle?

Select one:

A. Principle 3: time dimension of investing

B. Principle 8: risk and return go hand in hand

C. Principle 9: mind games and your money

D. Principle 5: stuff happens the need for liquidity

E. Principle 6: waste not want not

Answer 1

Sunk Cost and Effect

Sunk cost is a cost which you would have already incurred but it cannot be recovered or you can say you have paid for some expenses which you would not get back ,its incurred and not recoverable.

Correct Answer is option C - Principle 9: Mind games and your money : This is correct answer because when you put  money on an Asset and it require futher processing or repair cost, else the money you spent to buy will be wasted ,you would spend money further to make it fit to use, or else your investment will become waste completely. This is called effect of sunk cost (When you put some more resources/Money so that money you already used is not wasted).

Incorrect-Principle 3: Time dimension of investing - It means when you are investing on something keeping on mind the particular period /Time you would like to receive it.Its like when you are investing and when you would receive back so that you can decide your future obligations accordingly.

Incorrect-Principle 8: Risk and return go hand in hand- Its based on basic principle of risk and return. If you are ready to take more risk you will get more return.If you take less risk , return will also be less.(Vice Versa)

Incorrect-Principle 5: Stuff happens the need for liquidity- Liquidity is converting to something to cash and when you take some action to convert something (eg -Securities) to Cash.

Incoreect-Principle 6: Waste not want not- Use of Commodity or resource carefully without extravagance you will never be in need.