NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Behavioural Finance
An investor sells shares that have risen in value too early to 'lock in a gain', but holds on to shares that have fallen, hoping they will recover to the purchase price. Which behavioural bias does this pattern best describe?
This pattern is the disposition effect. Investors sell winning investments too quickly to book gains and hold losing ones too long to avoid realising a loss, because of loss aversion and regret. It differs from home bias, recency bias and representativeness bias.
- ADisposition effectCorrect
- BHome bias
- CRecency bias
- DRepresentativeness bias
Explanation
The disposition effect is the tendency to sell winners too soon and hold losers too long, driven by loss aversion and regret avoidance. Home bias concerns preferring domestic or familiar assets. Recency bias overweights recent events. Representativeness relies on stereotypes or patterns.
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