NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of 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 back to my purchase price'. Which bias does this pattern most directly illustrate?
This is the disposition effect: investors sell winning investments too quickly to lock in gains while holding losing investments too long, hoping to break even. It stems from loss aversion and regret avoidance rather than from rational assessment of the future prospects of each stock.
- ADisposition effectCorrect
- BHome bias
- CRepresentativeness bias
- DStatus quo bias
Explanation
The disposition effect is the tendency to sell winners too early and hold losers too long, driven by regret avoidance and the wish to realise gains. Home bias concerns preference for domestic assets, and status quo bias concerns inertia, not selective selling of winners.
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