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

Mrs. Nair holds a Rs 10 lakh stock bought at Rs 500 per share, which now trades at Rs 350. She says she will sell only when the price returns to Rs 500. She ignores that a better opportunity exists elsewhere. Which pair of biases most directly explains her stance?

Loss aversion and anchoring on the purchase price explain her stance. She dislikes realising a loss and fixes on Rs 500 as the reference point, so she waits to break even rather than judging the stock on its future prospects. Advisers can reframe by asking if she would buy today.

  1. ALoss aversion and anchoring on purchase priceCorrect
  2. BRecency bias and availability bias
  3. CSelf-attribution and illusion of control
  4. DMental accounting and herding

Explanation

Her reluctance to realise a loss reflects loss aversion (disposition effect), and her fixation on the Rs 500 purchase price is anchoring. The other pairs do not explain waiting to break even. The adviser should reframe by asking whether she would buy the stock today at Rs 350.

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