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

Mr. Iyer refuses to sell a stock bought at Rs 500 that now trades at Rs 350, saying 'I will sell only when it gets back to Rs 500', although the research suggests weak prospects. Which pair of behavioural tendencies best explains his stance, and what is the most suitable adviser response?

Anchoring to the Rs 500 purchase price combined with the disposition effect, reluctance to realise losses, explains his stance. The adviser should reframe by asking whether he would buy the stock today at Rs 350, shifting focus from the sunk cost to future prospects.

  1. AAnchoring and disposition effect; reframe the decision by asking whether he would buy the stock today at Rs 350Correct
  2. BHerding and recency; advise him to follow the majority view on the stock
  3. CMental accounting and home bias; ask him to open a separate account for the stock
  4. DOverconfidence and hindsight; advise him to increase his holding to average down

Explanation

He is anchored to the purchase price and is reluctant to realise a loss, which is the disposition effect. Asking whether he would buy today at Rs 350 removes the sunk-cost anchor and focuses on future prospects. Averaging down or following the crowd would reinforce, not correct, the bias.

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