Behavioural finance explains why investors often act irrationally — and it is a dedicated, scoring chapter in the NISM Series XV syllabus. The questions are mostly definition and example based, so once you know the key biases, the marks are straightforward. Here are the biases you must know.
What is behavioural finance?
Traditional finance assumes investors are rational and markets are efficient. Behavioural finance recognises that real investors are influenced by emotions and cognitive biases, leading to predictable mistakes. Understanding these biases helps analysts and investors make better decisions.
Key behavioural biases to know
Anchoring
Relying too heavily on the first piece of information (the "anchor"). Example: refusing to sell a stock below your purchase price, even when the fundamentals have changed.
Herding
Following the crowd rather than your own analysis. Herding fuels bubbles and panics — investors buy because everyone is buying.
Overconfidence
Overestimating your own knowledge or ability. Overconfident investors trade too often and underestimate risk.
Loss aversion
The pain of a loss feels stronger than the pleasure of an equivalent gain. This causes investors to hold losers too long and sell winners too early.
Confirmation bias
Seeking out information that confirms existing beliefs and ignoring evidence that contradicts them. An analyst convinced a stock is great reads only the bullish reports.
Recency bias
Giving too much weight to recent events. After a market rally, investors assume gains will continue; after a crash, they expect more losses.
Mental accounting
Treating money differently depending on its source or label — for example, treating a bonus as "fun money" to gamble with, while being cautious with salary.
Disposition effect
A consequence of loss aversion: the tendency to sell winners and hold losers, the opposite of optimal behaviour.
How biases affect markets
These biases do not just hurt individuals — collectively they move markets. Herding and overconfidence inflate bubbles; loss aversion and panic deepen crashes. Recognising them helps an analyst stay objective and spot opportunities created by others' mistakes.
How behavioural finance is tested in NISM XV
Expect questions like:
- "An investor refuses to sell below cost price — which bias is this?" (Anchoring / loss aversion)
- "Buying a stock only because everyone else is — which bias?" (Herding)
- Match a scenario to the correct bias.
So focus on clear definitions and one example each — that is all you need.
Practise behavioural-finance questions, with explanations, on ScoreSetu. For the full topic map, see the NISM XV syllabus guide.
Learn these biases — anchoring, herding, overconfidence, loss aversion, confirmation, recency, mental accounting and the disposition effect — and behavioural finance becomes one of the easiest scoring sections of the NISM Series XV Research Analyst exam.