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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Behavioural Finance

A client keeps a separate mental bucket for her bonus money and invests it in highly speculative stocks, while being very conservative with her salary savings, even though both are fungible. This behaviour is best described as:

This is mental accounting: the client treats bonus money and salary savings as separate buckets with different risk attitudes, even though money is fungible. Availability, endowment and overconfidence biases describe different tendencies not shown in this behaviour.

  1. AMental accountingCorrect
  2. BAvailability bias
  3. CEndowment effect
  4. DOverconfidence in forecasting

Explanation

Mental accounting is treating money differently depending on its source or intended use, though money is fungible. The client treats bonus and salary money differently, which is exactly this bias. Endowment effect relates to overvaluing what one owns, and availability bias to using easily recalled information.

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