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

An investor splits money into a 'safe bucket' for children's education and a 'fun bucket' for speculative trading, and takes large risks in the second while being very conservative in the first, without regard to overall portfolio risk. Which approach should an adviser recognise this as?

This is mental accounting. The investor treats money in separate mental buckets with different risk attitudes instead of evaluating overall portfolio risk and return. An adviser can use the goal-based buckets constructively while ensuring the combined portfolio matches the investor's total risk capacity and tolerance.

  1. AMental accountingCorrect
  2. BFraming effect only
  3. CEndowment effect
  4. DConfirmation bias

Explanation

Mental accounting is treating money differently depending on its mental label, rather than viewing the portfolio as a whole. Endowment effect is overvaluing what one owns, confirmation bias is seeking supporting information, and framing is about how choices are presented. The adviser should guide towards a total-portfolio view while respecting goal-based buckets.

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