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

A client sells her equity fund units at a small loss and immediately feels relief, yet she keeps a larger-loss holding indefinitely, hoping it will recover to her purchase price. Which behavioural bias does this most directly illustrate?

This is the disposition effect: investors avoid realising larger losses and hold losers hoping to break even, while readily closing positions that give quick relief. Her behaviour is driven by regret avoidance and reference to the purchase price, not by the investment's future prospects.

  1. ADisposition effectCorrect
  2. BHome bias
  3. CRecency bias
  4. DRepresentativeness bias

Explanation

The disposition effect is the tendency to sell winners (or small losers) early to realise comfort while holding larger losers to avoid regret. The client anchors on her purchase price and avoids realising the bigger loss. Home bias concerns preference for domestic assets and does not fit.

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