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

Ramesh, a Pune investor, refuses to sell a stock bought at ₹500 even though it now trades at ₹350 and the fundamentals have deteriorated. He says he will sell only when it returns to ₹500. Which bias best explains his behaviour?

Ramesh shows loss aversion with a break-even mindset. Realising a loss is psychologically painful, so he holds a deteriorating stock until it recovers to his purchase price, ignoring current fundamentals. The other biases concern stereotypes, vivid memories or domestic preference, not avoiding the pain of a realised loss.

  1. ALoss aversion with a break-even mindsetCorrect
  2. BRepresentativeness bias
  3. CAvailability bias
  4. DHome bias

Explanation

Loss aversion makes realising a loss feel painful, so investors hold losers hoping to get back to the purchase price. Representativeness relates to judging by stereotypes, availability to recent or vivid memory, and home bias to preferring domestic assets. None of these describes anchoring on a break-even price to avoid realising a loss.

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