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

Caselet: Mr. Rao earned Rs 8 lakh as a bonus and treats it as 'free money', investing it entirely in a speculative small-cap theme, while he keeps his salary savings in low-yield deposits and says he would never risk those. Which bias is being shown, and what is the adviser's best response?

This is mental accounting, where money is treated differently depending on its source. The adviser should move him to a total-portfolio view, assessing every rupee against overall goals and risk capacity, so bonus money is not gambled while salary savings earn too little.

  1. AMental accounting; evaluate all money on a total-portfolio basis against his overall goalsCorrect
  2. BAnchoring; ask him to recall the purchase price of the stocks
  3. CHerding; advise him to follow the majority view
  4. DEndowment effect; advise him to retain existing deposits

Explanation

Treating bonus money differently from salary savings is mental accounting. The remedy is a total-portfolio view where each rupee is judged by its contribution to overall goals and risk. Anchoring, herding and endowment effect do not describe separate treatment of money by source.

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