Behavioral Biases of Individuals: practice question
Tamsin Reed, a retail investor, sells her winning stocks quickly after small gains but holds losing positions for years, saying she wants to get back to her purchase price before selling. Her behavior is best described as:
- Mental accounting
- Framing bias
- The disposition effect
Show answer and explanation
Correct answer: C
Explanation: C is correct: the disposition effect is the tendency, rooted in loss aversion, to sell winners too soon and hold losers too long in order to avoid realizing a loss. A is wrong because mental accounting means treating money differently depending on which subjective bucket it sits in, such as spending a bonus freely while protecting salary income. B is wrong because framing bias occurs when decisions change depending on how identical choices are worded, such as gain-frame versus loss-frame presentations, not when gains and losses are realized asymmetrically.
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