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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 immediately after a 6% fall, even though her long-term goal is 12 years away, because 'the pain of seeing red is unbearable'. Which bias is the adviser most directly addressing when explaining that losses are felt more strongly than equal gains?

The bias is loss aversion. Investors feel losses more strongly than equal gains, so the client sold after a modest fall despite a twelve-year horizon. The other biases involve excess self-belief, fixation on a reference price or preference for familiar assets, which do not describe this reaction.

  1. ALoss aversionCorrect
  2. BOverconfidence
  3. CAnchoring
  4. DHome bias

Explanation

Loss aversion is the tendency to feel the pain of a loss more intensely than the pleasure of an equivalent gain, leading to panic selling. Overconfidence concerns excess belief in one's ability, anchoring concerns fixation on a reference value, and home bias concerns preference for familiar domestic assets. None of these describes the client's reaction to the fall.

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