NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Behavioural Finance in Practice
A client sells winning investments quickly to lock in gains but holds losing investments for years hoping to break even. This pattern is known as:
The pattern is called the disposition effect. It means selling winning investments too soon to lock in gains while holding losers too long to avoid realising losses, and it stems from loss aversion and regret avoidance rather than from an assessment of future prospects.
- ADisposition effectCorrect
- BEndowment effect
- CHindsight bias
- DRepresentativeness
Explanation
The disposition effect is the tendency to sell winners too early and hold losers too long, driven by loss aversion and regret avoidance. The endowment effect is overvaluing what one owns, hindsight is believing outcomes were predictable, and representativeness is judging by resemblance to stereotypes.
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