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

Meera, a client, always allocates exactly one-third of her money to each of three buckets: a savings account, a fixed deposit and an equity fund, because it feels 'fair', without considering her goals or risk capacity. Which heuristic is closest to this behaviour?

This is naive diversification, also called the 1/n heuristic. Meera divides money equally across the options on offer for the sake of fairness instead of matching allocation to goals and risk capacity, which differs from availability, endowment or hindsight bias.

  1. ANaive diversification (1/n heuristic)Correct
  2. BAvailability bias
  3. CEndowment effect
  4. DHindsight bias

Explanation

Splitting money equally across available options without regard to needs is the 1/n or naive diversification heuristic. Availability relies on easily recalled events, endowment values owned assets more, and hindsight claims past events were predictable; none fits.

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