Which one of the following statements regarding the behavioural finance is correct?

Select one:

a. Limited attention refers to the situation where we only focus on the short-term investment return

b. Providing investors with vast amount of information available in the market will solve problems with limited attention

c. The disposition effect refers to the situation where investors sells shares immediately after a small price rise, while refusing to sell shares after incurring a huge loss.

d. The disposition effect is a consequence of being overconfidence.

Answer:

c. The disposition effect refers to the situation where investors sells shares immediately after a small price rise, while refusing to sell shares after incurring a huge loss.

Step-by-step explanation

The disposition effect in behavioral finance relates to the inclination of investors to sell assets that have increased in value while keeping those that have dropped in value. This behavior can be explained by investor loss aversion, mental accounting and regret avoidance.Investors value gains or losses on investments based on a reference point which is the purchase price of the asset. They therefore sell shares whose price has risen instead of holding them in hope of further price rise. While this behavior may be logical and healthy, it may deny them some future gains.