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

Mr. Iyer, 52, invested heavily in a pharma stock because its last three quarters showed strong growth, and he assumes the trend will continue indefinitely, ignoring long-run mean reversion in earnings. Which bias is primarily at work?

Representativeness bias is at work. The investor treats a short run of strong quarterly growth as representative of the firm's permanent nature and extrapolates it, ignoring the base rate of mean reversion in earnings over longer periods.

  1. ARepresentativeness biasCorrect
  2. BEndowment effect
  3. CMental accounting
  4. DStatus quo bias

Explanation

Extrapolating a short recent pattern as if it represents the long-term nature of the company is representativeness (a heuristic-driven, cognitive bias). Endowment relates to overvaluing owned assets, mental accounting to separating money into buckets, and status quo to inertia; none fits trend extrapolation.

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