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

A client who sold a mutual fund unit at a small profit soon after purchase, yet keeps holding another unit that has fallen 30% hoping it will 'come back to cost', is most clearly displaying which tendency?

This is the disposition effect: investors sell gainers quickly and keep losers hoping to break even, because realising a loss feels painful. The behaviour is about reluctance to book losses, not about domestic preference or stereotyping.

  1. ADisposition effectCorrect
  2. BHome bias
  3. CRepresentativeness
  4. DAnchoring to market index

Explanation

The disposition effect is the tendency to sell winners too early and hold losers too long to avoid realising a loss. Home bias concerns preference for domestic assets, representativeness relies on stereotypes, and index anchoring does not describe this loss-holding pattern.

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