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

Caselet: Mr. Rohan Mehta, 45, bought shares of a pharma company because its last three quarterly results were excellent and he assumes the trend will continue indefinitely, without examining valuation or the industry cycle. Which bias is primarily at work?

The primary bias is extrapolation, a recency-driven error where an investor assumes recent strong results will persist indefinitely. Mr. Mehta ignores valuation and industry cycles, treating a short trend as a reliable predictor of long-term performance.

  1. AAnchoring
  2. BConfirmation bias
  3. CMental accounting
  4. DExtrapolation (recency-driven) biasCorrect

Explanation

Projecting a short run of recent results into the future without regard for mean reversion or valuation is extrapolation/recency bias. Anchoring relies on a specific reference number, confirmation bias seeks supportive evidence only, and mental accounting separates money into mental buckets.

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