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

Caselet: Meera, a 38-year-old client, invested heavily in two IT-sector funds because they gave the highest returns in the last year. She tells her adviser that the sector will 'obviously continue to do well' and has ignored other asset classes. Which pair of biases is most clearly shown?

Meera shows recency bias combined with overconfident extrapolation. She gives too much weight to last year's top returns and is certain they will continue, which leads to concentration in one sector. The case offers no evidence of inertia, endowment, mental accounting or conservatism.

  1. ARecency bias and overconfidence-driven extrapolationCorrect
  2. BStatus quo bias and endowment effect
  3. CMental accounting and regret aversion
  4. DCognitive dissonance and conservatism

Explanation

Giving excessive weight to the latest year's performance and projecting it forward is recency bias or extrapolation, and her certainty ('obviously') reflects overconfidence. Nothing in the case suggests inertia, attachment to owned assets, separate mental accounts or reluctance to update beliefs. Hence the first pair fits best.

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