NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Behavioural Finance
An investor refuses to sell a stock that has fallen 30% below her purchase price, saying she will sell only when it returns to her cost. Which behavioural bias does this most directly illustrate?
This is the disposition effect: the investor holds a losing stock to avoid realising a loss, waiting to break even at her purchase price. The bias leads investors to hold losers too long and sell winners too soon, which is unrelated to recency or home bias.
- ADisposition effectCorrect
- BRecency bias
- CHome bias
- DAnchoring to a market index
Explanation
The disposition effect is the tendency to sell winners too early and hold losers too long to avoid realising a loss. Refusing to sell until the price returns to cost is a classic example. Recency bias concerns overweighting recent events, and home bias concerns preference for domestic or familiar assets.
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