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

Mr. Iyer, 58, invested heavily in the shares of his own employer, a listed Indian IT company, because he 'knows the firm better than anyone'. He also believes his analysis is more accurate than that of professional analysts. The most appropriate description of his belief about his own analysis is:

This is overconfidence bias, specifically an illusion of knowledge: the investor overestimates the accuracy of his own information and ability because he is familiar with his employer. It leads to concentrated, under-diversified positions and is a cognitive bias rather than an emotional one.

  1. AOverconfidence biasCorrect
  2. BAnchoring bias
  3. CMental accounting
  4. DHindsight bias

Explanation

Believing one's knowledge and ability exceed those of professionals is overconfidence, often seen as the illusion of knowledge. Anchoring relates to fixating on a reference value, mental accounting to segregating money into buckets, and hindsight bias to claiming past events were predictable.

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