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

A client keeps money earmarked for a child's education in a low-yield savings account while simultaneously borrowing at a high interest rate on a personal loan, because she treats the two pools of money as separate. Which bias is this?

This is mental accounting: the client treats education savings and loan money as separate pools, ignoring that money is fungible. The result is holding low-yield savings while paying high loan interest, which an integrated view of her whole balance sheet would reveal as inefficient.

  1. AMental accountingCorrect
  2. BAvailability bias
  3. CConfirmation bias
  4. DEndowment effect

Explanation

Mental accounting is treating money differently based on its label or source, even though money is fungible. Holding low-yield savings while paying a high loan rate is a classic result, and the adviser should show the net cost across the whole balance sheet.

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