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

Caselet: Mr. Khanna inherited shares of a family company worth 60% of his portfolio. He refuses to sell any, saying 'my father held them for decades'. The company's prospects are weak. Diversification is clearly needed. Which approach is most consistent with good behavioural advice?

The best approach is to acknowledge his emotional attachment, show the concentration risk with numbers, and agree a phased reduction of the holding. This addresses the endowment effect while keeping the client engaged, unlike forced sale, dismissing emotions or increasing the position.

  1. AAcknowledge the emotional attachment, quantify concentration risk, and agree a phased reduction planCorrect
  2. BSell the entire holding immediately without discussion
  3. CTell him that emotions are irrational and must be ignored
  4. DIncrease the holding to honour the family legacy

Explanation

This is the endowment effect combined with familiarity. Effective advice recognises the emotional element, demonstrates the concentration risk, and agrees a gradual, client-accepted plan. Forcing a sale or dismissing feelings damages trust, and adding to the holding raises risk.

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