According to the NISM workbook's section on 'Nudging the investor to behave better,' how can an Investment Adviser build an effective nudge for disciplined investing?

[ A ]By laying down advance ground rules, agreed to upfront by the client, such as rules for asset rebalancing, so that profit-booking happens automatically when asset prices rise and buying happens when prices fall[ CORRECT ]

[ B ]By opening a separate, budgeted account so the client can indulge in stress-driven shopping without it affecting the main portfolio

[ C ]By educating the client on the benefits of global diversification to overcome a preference for only domestic securities

[ D ]By pointing out that a single successful bet may be due to luck rather than skill, to dilute the client's confidence in her own trading ability

Takeaway

Option A is correct.

Derivation

The NISM workbook states that 'laying down advance ground rules that the client buys into allows the Investment Adviser to have built in nudges for the client to follow,' giving the example that 'ground rules on when to do asset re-balancing become an inbuilt nudge for profit booking when the asset prices go high and buying into an asset class when its prices are low.' The wrong options are genuine remedies discussed elsewhere in the same chapter, retail therapy, home country bias, and overconfidence, but are not the ground-rules nudging mechanism this section describes.

Why the others fail

B — By opening a separate, budgeted account so the client can indulge in stress-driven shopping without it affecting the main portfolio

This is the book's remedy for Retail Therapy, not the ground-rules nudge mechanism described in this section.

C — By educating the client on the benefits of global diversification to overcome a preference for only domestic securities

This is the book's antidote for Home Country Bias, not the nudge mechanism described in this section.

D — By pointing out that a single successful bet may be due to luck rather than skill, to dilute the client's confidence in her own trading ability

This addresses Overconfidence Bias, a separate behaviour discussed elsewhere in the chapter, not the ground-rules nudge mechanism.