ASIC financial adviser exam, Consumer behaviour and decision making question: paid A$50,000 for shares in a mining company

ASIC examConsumer behaviour and decision making

Margaret, 61, paid A$50,000 for shares in a mining company that are now worth A$30,000. She agrees with her adviser that the holding no longer fits her retirement goals, but says she will sell 'once it gets back to what I paid'. Her refusal to sell is an example of…

A overconfidence in the quality of her own original stock picks
B herding with the other investors who still hold the share
C loss aversion, shown as the disposition effect
D the availability heuristic, driven by recent news reports

Show the answer and explanation

Answer: C. loss aversion, shown as the disposition effect

Loss aversion is feeling losses more strongly than equal gains; its trading form, the disposition effect, is holding losers too long and selling winners too early (Kahneman 2012; Pompian 2012, on ASIC's Exam preparation guidance v6.0 reading list). Margaret accepts the shares no longer fit her goals yet will not realise the A$20,000 loss, which is that pattern. Nothing in the scenario says she rates her own stock picking highly, so overconfidence does not fit. She is not copying other investors, so it is not herding. Nothing suggests news coverage is driving her, so the availability heuristic does not fit either. The adviser can help by reframing the decision around her goals rather than the price she paid.

Common mistake

Her purchase price also acts as an anchor, but refusing to realise a loss is loss aversion.

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