Skip to content

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

Rohit Mehta, a Pune-based client, holds shares of an auto-ancillary company that he bought at Rs 480. The price has since fallen to Rs 360, and although his research now shows weak prospects, he refuses to sell, saying he will exit only when the price returns to Rs 480. Which behavioural bias best explains his refusal to sell?

His refusal is best explained by anchoring on the purchase price together with loss aversion. He treats Rs 480 as the reference point and avoids realising a loss, even though fundamentals have weakened, which is the classic disposition effect that advisers should help clients overcome.

  1. AAnchoring on the purchase price combined with loss aversion, leading to reluctance to realise a lossCorrect
  2. BRepresentativeness bias, where he assumes past winners will always remain winners
  3. CMental accounting, where he treats dividends and capital gains as interchangeable
  4. DHindsight bias, where he believes he predicted the fall all along

Explanation

Rohit fixes on his cost price of Rs 480 as a reference point and dislikes booking a loss, since losses hurt more than equal gains please. This is anchoring plus loss aversion, often seen as the disposition effect. Representativeness concerns judging by similarity to a category, and hindsight bias concerns believing past events were predictable; neither describes refusing to sell until the cost price is regained.

Did you get it right without looking?

One question tells you little. A timed set on Basics of Behavioural Finance shows your real accuracy, how long you take and where you lose marks.

Practise Basics of Behavioural FinanceFree diagnostic mock

More Basics of Behavioural Finance questions