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

Which of the following is classified as an emotional bias, as opposed to a cognitive bias, in behavioural finance?

Loss aversion is an emotional bias because it arises from feelings, such as the pain of losing, rather than faulty reasoning. Anchoring, confirmation bias and representativeness are cognitive biases from flawed information processing, which can usually be reduced by better information and education.

  1. ALoss aversionCorrect
  2. BAnchoring
  3. CConfirmation bias
  4. DRepresentativeness

Explanation

Emotional biases arise from feelings and impulses and are harder to correct; loss aversion is a standard example. Anchoring, confirmation and representativeness are cognitive errors stemming from faulty reasoning or information processing, and are generally easier to moderate through education.

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