An investor keeps holding a stock that has fallen sharply in value, hoping it will recover, while quickly selling another stock the moment it rises a little. Shefrin and Statman (1985) used this pattern to describe the Disposition Effect, which rests on which emotional bias?

[ A ]Loss Aversion Bias, where investors hold onto losing stocks too long and sell winning stocks too early because losses are felt far more powerfully than equivalent gains[ CORRECT ]

[ B ]Endowment Bias

[ C ]Status Quo Bias

[ D ]Mental Accounting

Takeaway

Option A is correct: this is Loss Aversion Bias, which Shefrin and Statman (1985) used to explain the Disposition Effect.

Derivation

The NISM workbook states that under Loss Aversion Bias, 'people dislike incurring losses much more than they enjoy making gains,' and credits Shefrin and Statman (1985) with proposing the Disposition Effect for 'holding losers too long and selling winners too early.' The book also links this to market anomalies, noting the disposition effect helps explain momentum in prices. Candidates often confuse this with Endowment Bias (valuing what one already owns) or Status Quo Bias (avoiding decisions to prevent regret), which are related but distinct emotional biases.

Why the others fail

B — Endowment Bias

Endowment Bias is about valuing an asset more merely because one already owns it, not about the asymmetric pain of losses versus gains.

C — Status Quo Bias

Status Quo Bias is about avoiding any portfolio action or decision at all to escape regret, not specifically about holding losers and selling winners.

D — Mental Accounting

Mental Accounting is about treating money differently depending on which mental bucket it is assigned to, not about the pain of realized losses versus gains.