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

Mr. Iyer bought shares at Rs 500 and they now trade at Rs 380. He says he will sell only when the price returns to Rs 500. Which pair of biases best describes this behaviour?

Anchoring on the purchase price combined with loss aversion best describes it. He fixes on Rs 500 as the reference point and refuses to realise a loss, so he holds the stock until break-even instead of evaluating its future prospects.

  1. AAnchoring on purchase price and loss aversionCorrect
  2. BOverconfidence and availability bias
  3. CMental accounting and recency bias
  4. DFraming and herding

Explanation

The purchase price of Rs 500 acts as the anchor for his decision, and his unwillingness to realise the loss shows loss aversion, i.e. the disposition to avoid crystallising losses. The other pairs involve biases not evidenced in the facts, such as herding or recency.

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