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

A client keeps Rs 5 lakh in a savings account earmarked for a 'holiday fund' while simultaneously carrying a personal loan at a much higher interest rate, refusing to use the holiday money to prepay it. This behaviour is best explained by:

This is mental accounting. The client treats the holiday fund as separate and untouchable, even though money is fungible and using it to prepay a high-interest loan would improve overall wealth. Representativeness, availability and confirmation biases concern judgement and evidence, not labelling money.

  1. AMental accountingCorrect
  2. BRepresentativeness
  3. CAvailability bias
  4. DConfirmation bias

Explanation

Mental accounting means treating money differently depending on its label or source, even though money is fungible. The client ignores that prepaying the costlier loan would improve overall wealth. The other biases relate to pattern judgement, memorable events and seeking supporting evidence.

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