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

Which statement correctly distinguishes behavioural finance from the efficient market hypothesis (EMH) as treated in the NISM X-B syllabus?

Behavioural finance argues that psychological biases cause systematic departures from rational decisions and can produce mispricing, while the efficient market hypothesis argues that prices already reflect available information so abnormal returns cannot be earned consistently.

  1. ABehavioural finance assumes investors are always rational, while EMH assumes they are biased
  2. BBehavioural finance holds that psychological factors can cause systematic deviations from rational decisions and possible mispricing, whereas EMH holds that prices fully reflect available informationCorrect
  3. CBoth hold that investors can consistently earn abnormal returns using past prices
  4. DEMH accepts that cognitive biases drive prices, while behavioural finance denies this

Explanation

Behavioural finance studies how cognitive and emotional factors lead to systematic errors and can contribute to anomalies and mispricing. EMH asserts that prices reflect available information, so consistent abnormal returns are not possible. The other options reverse or misstate these positions.

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