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

Mr. Rao, a 45-year-old IT professional, bought shares of a company because his friend earned good returns on it. He ignored the fundamentals and his own risk profile. After the stock fell, he kept adding to the position, saying that his earlier decision could not have been wrong. Which pair of biases is most evident in his behaviour?

Mr. Rao shows herd behaviour by buying because a friend profited, and confirmation or commitment bias by adding to the losing position to justify his earlier decision. Neither mental accounting nor status quo bias explains both behaviours described.

  1. AHerd behaviour and confirmation or commitment biasCorrect
  2. BMental accounting and hindsight bias only
  3. CRepresentativeness and loss of liquidity illusion
  4. DStatus quo bias and framing

Explanation

Buying because a peer did so reflects herding or following others. Adding more to defend a prior decision and seeking to justify it reflects commitment or confirmation bias. The other pairs do not match both behaviours described.

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