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

A client refuses to sell a mutual fund scheme that has fallen 30% below her purchase price, saying she will sell only when it 'gets back to what I paid'. Which behavioural bias is most clearly displayed?

The behaviour shows loss aversion combined with anchoring on the purchase price. The client dislikes realising a loss more than she values an objective review, so she waits to break even. The other biases listed do not describe holding on solely for the purchase price.

  1. ALoss aversion with a purchase-price anchorCorrect
  2. BOverconfidence about forecasting ability
  3. CRepresentativeness of recent returns
  4. DHome bias towards domestic assets

Explanation

The client treats the purchase price as a reference point and is reluctant to realise a loss. This is loss aversion tied to an anchor. Overconfidence concerns belief in one's skill, representativeness concerns judging by stereotypes or recent patterns, and home bias concerns geography, none of which is described.

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