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

Ms. Kavita Nair keeps Rs 5 lakh in a savings account labelled 'child's education' earning 3%, while simultaneously carrying a personal loan at 14% and refusing to use the savings to repay it. Which concept best describes her behaviour?

This is mental accounting: she treats money as separate labelled buckets rather than fungible. Her education fund earns 3% while her loan costs 14%, so ignoring the interest gap is irrational financially. An adviser can show the net cost of keeping both.

  1. AMental accountingCorrect
  2. BAvailability bias
  3. CHindsight bias
  4. DRepresentativeness

Explanation

Mental accounting treats money as non-fungible by assigning it to labelled buckets. Kavita keeps the education bucket intact even though repaying a 14% loan with a 3% asset would improve her net position. The other biases concern recall, judging past events as predictable, or stereotyping, none of which fit.

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