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

An investor holds a stock that has fallen 30% below her purchase price and refuses to sell it, waiting only to 'get back to even' before exiting, even though better opportunities exist. Which behavioural bias best describes this?

The behaviour is the disposition effect, rooted in loss aversion. Investors avoid realising losses and hold losing stocks hoping to break even, while selling winners early. This is different from overconfidence, availability or representativeness, which concern skill, recall of vivid events and stereotype-based judgements.

  1. ADisposition effect linked to loss aversionCorrect
  2. BOverconfidence bias
  3. CAvailability bias
  4. DRepresentativeness bias

Explanation

The disposition effect is the tendency to hold losing investments too long and sell winners too early, driven by loss aversion and reluctance to realise a loss. Waiting to break even is its classic sign. Overconfidence concerns overestimating one's skill, not refusing to realise losses.

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