An investor refuses to participate in a well-diversified equity portfolio with strong growth prospects because the psychological pain of potentially losing Rs. 10,000 is felt far more intensely than the pleasure of gaining Rs. 10,000. Which behavioral bias is demonstrated?

[ A ]Loss Aversion[ CORRECT ]

[ B ]Availability Heuristic

[ C ]Confirmation Bias

[ D ]Herd Mentality

Takeaway

Option A is correct: Loss Aversion

Derivation

Loss aversion, identified by Daniel Kahneman and Amos Tversky, describes the cognitive bias where individuals feel the pain of a financial loss substantially more intensely than an equivalent monetary gain. This leads investors to avoid profitable opportunities due to an exaggerated fear of downside. This question tests the candidate's grasp of behavioral finance concepts affecting asset allocation. A common error is confusing loss aversion with confirmation bias or herd mentality.

Why the others fail

B — Availability Heuristic

Availability heuristic refers to relying overly on immediately recalled examples rather than evaluating asymmetric pain of loss.

C — Confirmation Bias

Confirmation bias involves selectively seeking data that validates pre-existing opinions while disregarding opposing evidence.

D — Herd Mentality

Herd mentality describes blindly mimicking the actions of the broader crowd rather than experiencing loss-pain asymmetry.