Suppose you make a small investment in a start-up Internet company that seems to have great potential. After the first quarter, you learn that the company suffered an operating loss. You cannot recover your investment; your goal is to maximize your long-term wealth. Should you continue to invest in the company? Consider two possible ways to look at this situation: if you consider the performance of the company during the first quarter to be a loss, and if you view continued investment as a choice between:
losing the small amount of money you have already invested, or
taking additional risk by investing more money in the company, which could turn around and make a large profit or plummet even further.
The reference point ...