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

Which of the following is an example of an emotional bias, rather than a cognitive error, in behavioural finance?

Loss aversion is an emotional bias because it arises from feelings about losses rather than faulty reasoning. Anchoring, base-rate neglect and conservatism are cognitive errors, which can be mitigated with education and information, whereas emotional biases are harder to correct.

  1. ALoss aversionCorrect
  2. BAnchoring
  3. CBase-rate neglect
  4. DConservatism bias

Explanation

Emotional biases arise from feelings or impulses, such as loss aversion, endowment effect and regret aversion, and are harder to correct. Anchoring, base-rate neglect and conservatism are cognitive errors stemming from faulty reasoning or information processing and can be reduced through better information.

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