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

A client sells equity fund units immediately after a small gain but holds on to a loss-making stock for years, hoping it will recover to the purchase price. Which behavioural bias does this pattern best describe?

The pattern is the disposition effect. Investors book gains quickly and keep losing positions, hoping to break even, because realising a loss is painful. An adviser should counter it with rules-based review of each holding on its future prospects rather than on purchase price.

  1. ADisposition effectCorrect
  2. BHome bias
  3. CRepresentativeness bias
  4. DHindsight bias

Explanation

The disposition effect is the tendency to sell winners too early and hold losers too long to avoid realising a loss. Home bias concerns preference for domestic or familiar assets. Representativeness is judging by resemblance to a stereotype. Hindsight bias is believing past events were predictable.

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