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

Caselet: A client bought a stock at Rs 400, which has fallen to Rs 300. He refuses to sell until it returns to Rs 400, although the adviser's analysis suggests the fair value is Rs 280 and a better opportunity exists elsewhere. Which pair correctly identifies his bias and the decision rule the adviser should emphasise?

The client is anchored on his Rs 400 purchase price. The adviser should stress that this price is a sunk cost and the decision must rest on expected future returns. Since estimated fair value of Rs 280 is below the Rs 300 market price, redeploying the money is more rational.

  1. AAnchoring on purchase price; decide based on future expected return, treating the purchase price as a sunk costCorrect
  2. BConfirmation bias; seek more news supporting the stock
  3. CHindsight bias; decide based on what would have happened at Rs 400
  4. DHome bias; shift the money to domestic stocks only

Explanation

Fixation on the Rs 400 purchase price is anchoring, tied to regret and loss aversion. The purchase price is a sunk cost, so the decision should depend on expected future return versus alternatives. With fair value of Rs 280 below the current price of Rs 300, holding offers negative expected return, so the rule favours selling.

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