Skip to content

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

Caselet: Mr. Rao, 45, keeps Rs 10 lakh in a savings account labelled 'child education', yet he has also taken a personal loan at 14% to buy a car, refusing to use the Rs 10 lakh. The savings account earns 3% a year. Ignoring taxes and fees, he plans to hold the Rs 10 lakh for one more year while paying the loan interest on Rs 5 lakh outstanding. Which statement is correct?

Mental accounting is at work, and repaying the Rs 5 lakh loan from the earmarked balance saves about Rs 55,000 for the year. Loan interest avoided is Rs 70,000 at 14%, less Rs 15,000 of savings interest lost at 3%.

  1. AMental accounting is at work, and using Rs 5 lakh to clear the loan would save about Rs 55,000 net of lost interest for the yearCorrect
  2. BMental accounting is at work, and using Rs 5 lakh to clear the loan would save about Rs 70,000 net of lost interest for the year
  3. CHindsight bias is at work, and clearing the loan would save Rs 15,000
  4. DHerding is at work, and clearing the loan would save Rs 55,000

Explanation

He treats money in separate mental buckets. Loan interest is 14% of Rs 5 lakh = Rs 70,000. Lost savings interest is 3% of Rs 5 lakh = Rs 15,000. Net saving = Rs 55,000. Rs 70,000 ignores the foregone interest; hindsight bias and herding do not describe the situation.

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