A client, Michelle, received a $50,000 inheritance. Instead of using it to pay down her $30,000 mortgage at 4% interest, she plans to invest the entire amount in a new 'high-growth' tech startup recommended by a friend, believing 'inheritance money is for taking risks.' What behavioural bias is Michelle primarily demonstrating?

Question: A client, Michelle, received a $50,000 inheritance. Instead of using it to pay down her $30,000 mortgage at 4% interest, she plans to invest the entire amount in a new 'high-growth' tech startup recommended by a friend, believing 'inheritance money is for taking risks.' What behavioural bias is Michelle primarily demonstrating?

Answer options: ✅ Mental Accounting

• Overconfidence
• Gambler's Fallacy
• Hindsight Bias

Correct answer: Mental Accounting

Explanation: Michelle is compartmentalizing her inheritance as 'risk money,' distinct from her mortgage obligation, which is a clear example of mental accounting. This leads her to make a financially suboptimal decision by not addressing her guaranteed interest debt first.