Skip to content

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

An adviser notices that Mr. Iyer, a client, always evaluates each holding separately and keeps a 'safe' FD bucket and a 'speculative' bucket, refusing to rebalance across them. Which concept best explains this approach, and what is the practical remedy?

The behaviour is mental accounting, where money is divided into separate buckets and judged individually. The adviser should move the client to a total-portfolio view and assess asset allocation against overall goals and risk tolerance, rather than managing each bucket in isolation.

  1. AMental accounting; review the total portfolio against overall goals and riskCorrect
  2. BAnchoring; ask him to ignore past prices
  3. COverconfidence; increase his equity allocation
  4. DHerding; recommend following popular funds

Explanation

Treating money in separate mental buckets and refusing to look across them is mental accounting. The remedy is to assess the aggregate portfolio against the overall goals and risk capacity. Anchoring, overconfidence and herding do not describe segregation of money into buckets.

Did you get it right without looking?

One question tells you little. A timed set on Behavioural Finance in Practice shows your real accuracy, how long you take and where you lose marks.

Practise Behavioural Finance in PracticeFree diagnostic mock

More Behavioural Finance in Practice questions