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

A client sold a stock at a loss and then refused to consider any similar stock, although research showed it was attractive. Which behavioural bias is best described by the adviser's observation that the client is avoiding a repeat of the emotional pain of the earlier loss?

The behaviour is regret aversion. The client avoids similar stocks to escape the emotional pain of repeating an earlier loss, even though the new opportunity looks attractive. It is an emotional bias, and advisers address it by explaining process-based decisions and using disciplined asset allocation.

  1. ARegret aversionCorrect
  2. BRepresentativeness
  3. CAnchoring to a benchmark
  4. DHindsight overconfidence

Explanation

Regret aversion makes investors avoid decisions that could produce the pain of another bad outcome, so the client shuns similar stocks even when they look attractive. Representativeness is about judging by resemblance to stereotypes. Anchoring is fixation on a reference value, and hindsight bias is believing past events were predictable.

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