Skip to content

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

Caselet: Mr. Kulkarni, 52, keeps 70% of his wealth in his employer's shares and his family's ancestral city real estate, saying he understands them well. He rejects diversification into other assets as 'unfamiliar and risky'. His risk capacity is moderate. The adviser decides to design a phased diversification plan. Which combination of biases is most evident, and which design feature best addresses it?

Familiarity bias and overconfidence are evident, and a staged reallocation with predefined concentration limits best addresses them. Phasing eases the client's discomfort, while limits reduce the risk from holding most wealth in employer shares and local real estate that he feels he understands.

  1. AFamiliarity bias and overconfidence; staged reallocation with predefined concentration limitsCorrect
  2. BHindsight bias and mental accounting; lump-sum shift to debt
  3. CGambler's fallacy and framing; increase employer shares
  4. DConservatism bias and recency bias; hold the concentrated position for tax reasons only

Explanation

Preference for known assets and belief that knowledge reduces risk indicate familiarity bias and overconfidence. A staged plan with explicit concentration limits reduces regret and resistance while lowering single-asset risk. The other options mismatch the bias or increase concentration.

Did you get it right without looking?

One question tells you little. A timed set on Behavioural Finance in Practice shows your real accuracy, how long you take and where you lose marks.

Practise Behavioural Finance in PracticeFree diagnostic mock

More Behavioural Finance in Practice questions