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

Caselet: Arjun, 45, invested ₹10 lakh in a thematic fund after it returned 40% last year. He says, 'Anything with that track record will keep delivering.' He also dismisses a report on higher fund risk, but readily shares articles supporting his view. Which TWO biases are most clearly present, in order of the statements?

The two biases are recency or extrapolation, because Arjun assumes last year's 40% return will continue, and confirmation bias, because he ignores the risk report while favouring articles that support his view. The other pairs lack supporting facts in the case.

  1. AExtrapolation of recent returns (recency) and confirmation biasCorrect
  2. BMental accounting and regret aversion
  3. CStatus quo bias and endowment effect
  4. DOverconfidence and hindsight bias alone, with no confirmation element

Explanation

Expecting last year's 40% to continue is recency or extrapolation bias. Dismissing contrary reports while favouring supportive articles is confirmation bias. The other pairs need features such as separate mental accounts, inertia or ownership attachment that the case does not mention.

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