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

Which of the following is a recommended practice for an adviser who wants to reduce the impact of a client's overconfidence on portfolio decisions?

The recommended practice is to agree a written investment policy statement with predefined rules and to review the client's actual trading results against benchmarks. This gives objective feedback and discipline, reducing excessive trading and underestimation of risk that come from overconfidence.

  1. AAgree an investment policy statement with rules and review trading records against benchmarksCorrect
  2. BEncourage frequent trading to build the client's experience
  3. CAvoid discussing past decisions that did not work out
  4. DLet the client override the asset allocation whenever he feels sure

Explanation

Overconfident investors trade excessively and underestimate risk. A written investment policy statement with predefined rules, plus objective review of past outcomes against benchmarks, provides discipline and feedback. The other options reinforce the bias.

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