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

Ms. Fernandes, aged 45, refuses to sell a stock that has fallen 40% and says she will sell only when it returns to her cost of ₹500. The stock now trades at ₹300 and the adviser's analysis shows weak prospects. Which adviser response best reflects good practice in dealing with this bias?

The adviser should ask whether she would buy the stock today at ₹300 with fresh money and base the decision on future prospects. This reframing detaches the decision from the ₹500 cost anchor and loss aversion, which are driving her refusal to sell.

  1. AAsk her whether she would buy the stock today at ₹300 with fresh money, and decide on future prospects rather than costCorrect
  2. BAdvise her to buy more at ₹300 to average the cost down regardless of prospects
  3. CTell her to ignore the loss because it is only a notional loss
  4. DWait until the price returns to ₹500 as she wishes

Explanation

The 'would you buy it today' reframing removes the purchase price as an anchor and focuses on forward-looking merit. Averaging down without analysis compounds the bias, and waiting for breakeven is the anchoring error itself.

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