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

Caselet (continued): Mr. Rao's 70% holding in his employer's shares persists because he feels he 'knows the company best' and cannot imagine selling shares received as stock options. Which pair of biases most directly explains this, and which adviser step is most appropriate?

Familiarity bias combined with the endowment effect explains it, and the adviser should propose a staged diversification plan with agreed concentration limits. This lowers the double exposure of salary and wealth to one employer while making the selling process less emotionally difficult.

  1. AFamiliarity bias with endowment effect; set a staged diversification plan with target concentration limitsCorrect
  2. BAnchoring with herding; advise buying more of the stock
  3. CGambler's fallacy with regret; advise doubling the holding
  4. DFraming with availability; advise leaving the position untouched

Explanation

Preferring a known company is familiarity bias, and overvaluing shares one already owns or received is the endowment effect. Concentration also links job and portfolio risk to one firm. A staged plan with agreed limits reduces risk gradually and eases the emotional barrier to selling. The other options recommend increasing or ignoring concentration.

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