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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 loss and now refuses to buy it again, though research shows it is attractively valued. Separately, he holds on to another losing stock hoping to 'at least break even'. Which bias best explains his reluctance to realise the loss in the second case?

The behaviour reflects the disposition effect, rooted in loss aversion. Investors avoid realising losses and hold losing stocks hoping to break even, while tending to sell winners early. The decision is driven by the pain of booking a loss rather than by the investment's future prospects.

  1. ADisposition effect driven by loss aversionCorrect
  2. BRecency bias
  3. CRepresentativeness bias
  4. DAvailability bias

Explanation

The disposition effect is the tendency to sell winners too early and hold losers too long, because realising a loss is painful (loss aversion). Holding to break even is the classic example. Recency, representativeness and availability biases concern how information is weighed, not reluctance to book losses.

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