NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Behavioural Finance
A client sells a stock immediately after it falls 5% from her purchase price even though fundamentals are unchanged, but she holds another stock that has fallen 30% hoping it will 'come back to my cost'. Which bias best explains her reluctance to sell the second stock?
The reluctance to sell the stock that has fallen 30% is best explained by loss aversion leading to the disposition effect: investors avoid realising losses and hold losers hoping to recover cost, while they quickly sell gainers or small decliners.
- ALoss aversion linked to the disposition effectCorrect
- BHome bias
- CRecency bias in forecasting
- DRepresentativeness bias
Explanation
The disposition effect is the tendency to sell winners early and hold losers too long to avoid realising a loss, which stems from loss aversion. Here the client anchors on her purchase cost and avoids booking a loss. Home bias concerns preference for domestic assets, which is not the issue described.
Did you get it right without looking?
One question tells you little. A timed set on Basics of Behavioural Finance shows your real accuracy, how long you take and where you lose marks.
More Basics of Behavioural Finance questions
- Mr. Raghav bought a stock after reading that a friend doubled his money in a similar sector. He ignored the company's weak financials becaus…
- An investor sells shares that have risen in value too early to 'lock in a gain', but holds on to shares that have fallen, hoping they will r…
- Caselet: Mr. Rao, 45, bought shares of a company at Rs 800. They now trade at Rs 500. Fundamentals have deteriorated and the adviser expects…
- In prospect theory, which feature of the value function best explains why investors often sell winning investments too early while holding l…
- Which of the following is classified as an emotional bias, as opposed to a cognitive bias, in behavioural finance?
- A client sells a stock immediately after it rises 8% to lock in the gain, but holds another stock that has fallen 25% hoping it will 'come b…