Which of the following is a fundamental principle of behavioral finance?
A) the use of P/E ratios
B) the tendency to increase the amount invested after a stock's price has declined
C) selling stocks at a loss for tax purposes
D) constructing a diversified portfolio

Question

Quizplus · Accepted Answer

The tendency to increase the amount invested after a stock's price has declined is a fundamental principle of behavioral finance, specifically the behavioral bias of "loss aversion." Other principles of behavioral finance include overconfidence, herding behavior, and anchoring bias. The other answer choices, such as using P/E ratios and constructing a diversified portfolio, are important concepts in finance generally, but are not unique to behavioral finance. Selling stocks at a loss for tax purposes is a tax management strategy, not a fundamental principle of Behavioral Finance.

Which of the Following Is a Fundamental Principle of Behavioral