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

Caselet: Meera, 45, holds Rs 10 lakh in a savings account earmarked 'for the house' and simultaneously carries a Rs 6 lakh personal loan at 14% interest. She refuses to use the savings to prepay the loan because 'that money is for the house and the loan is a separate matter'. Which bias explains her reasoning, and what is the adviser's best response?

Meera is displaying mental accounting, treating the house fund and loan as unrelated pools of money. The adviser should highlight the negative carry of earning little on savings while paying 14% on the loan and reframe money as fungible when planning the house goal.

  1. AMental accounting; show the net cost of holding low-yield savings while paying 14% and help her reframe money as fungibleCorrect
  2. BLoss aversion; advise her to take more equity risk
  3. CConfirmation bias; present only data supporting prepayment
  4. DAvailability bias; recall recent news on interest rate hikes

Explanation

Treating money in separate labelled accounts and not seeing it as fungible is mental accounting. The adviser can quantify the negative carry between a low savings yield and the 14% loan cost and rebuild the house goal after prepayment. Selective data presentation would be poor practice.

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