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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 two years ago and now refuses to buy it again even though research shows strong fundamentals, saying 'I will not touch that stock again'. Which behavioural bias is the most direct explanation?

Regret aversion is the best explanation. The client avoids the stock to escape the emotional pain linked to the earlier loss, rather than judging its present fundamentals. An adviser should reframe the decision around current evidence and the client's goals, not the past outcome.

  1. ARegret aversion arising from the earlier lossCorrect
  2. BAnchoring to the current market index level
  3. CRepresentativeness of recent sector returns
  4. DHindsight bias about the index trend

Explanation

Regret aversion makes a person avoid repeating a decision associated with the pain of an earlier bad outcome, even when the facts have changed. The adviser should separate the past loss from the current analysis. Anchoring concerns fixation on a reference number, which is not described here.

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