Skip to content

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

Mr. Rajesh Iyer, 45, invested Rs 10 lakh in a mid-cap fund that rose 40% in a year. He now wants to put his entire emergency fund into the same fund, saying 'this fund cannot go wrong.' Which pair of biases best explains his view?

Recency bias and overconfidence best explain his view. He projects one year of strong performance into the future and is overly sure of his choice. The adviser should explain risk, protect the emergency fund and rely on long-term data rather than recent returns.

  1. ARegret aversion and status quo bias
  2. BRecency bias and overconfidenceCorrect
  3. CMental accounting and endowment effect
  4. DConservatism and cognitive dissonance

Explanation

Extrapolating one year of strong returns into the future is recency bias, and believing the fund 'cannot go wrong' reflects overconfidence in his judgment. Regret aversion and status quo bias would lead to inaction, not aggressive reallocation. Conservatism is the opposite, a slow updating of beliefs.

Did you get it right without looking?

One question tells you little. A timed set on Behavioural Finance in Practice shows your real accuracy, how long you take and where you lose marks.

Practise Behavioural Finance in PracticeFree diagnostic mock

More Behavioural Finance in Practice questions