An investor is asked to choose between:
A. An assured gain of $400
B. A 25% chance of gaining $2,000 and a 75% chance of gaining nothing
The investor chooses option A.

It's likely the investor is exhibiting:

A. no bias
B. loss-aversion bias
C. over-confidence bias

Correct Answer: B

Rational investors should be willing to assume more risk to increase gains, not mitigate losses. Loss aversion makes investors hold their loss-making investment to avoid recognizing losses and instead, sell their profitable investments to lock in profits.

Option B has an expected value of $500. This is consistent with selling winning investment too soon in order to lock in a gain.

Note this is not risk aversion of a typical investor, as the expected value is different.