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

Mr. Iyer sold a stock at a 30% gain two years ago and it has since doubled. He now refuses to buy it again, saying 'I will not pay a higher price than I sold at'. Which bias is the adviser most likely to identify, and which approach is appropriate?

This is anchoring: Mr. Iyer fixes on his earlier selling price as a reference point. The adviser should help him judge the stock on present fundamentals, valuation and portfolio fit, because past prices do not determine whether the current price is attractive.

  1. AAnchoring on his previous selling price; evaluate the stock afresh using current fundamentals and valuationCorrect
  2. BHerding; advise him to follow what most investors are buying
  3. CHindsight bias; tell him he should have predicted the rise
  4. DEndowment effect; ask him to hold on to the stock he already owns

Explanation

He uses his past sale price as a reference point, which is anchoring. The adviser should shift attention to current fundamentals and valuation, since the earlier price is irrelevant to future returns. He does not own the stock, so endowment effect does not apply.

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