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Stocks 407: Psychology and Investing

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1.
What does anchoring often lead to?
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An unwillingness to part with laggard investments. Investors often cling to investments in order to wait for a point at which they will break even, even if the underlying business has fundamentally changed for the worse.
2.
Which of the following examples illustrates selective memory?
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Remembering only the successes. Selective memory, as a rule, selects those memories that we want to preserve.
3.
Confirmation bias is a good investing practice to follow because it usually leads to good decisions.
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False. While it sometimes does, it can also deprive us of choosing other, potentially good opportunities.
4.
In the psychology of investing, the "framing effect" refers to _______.
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Using a reference point to make investment decisions. Because this reference point can be subjective, it can lead to some rash decisions.
5.
In investing, sunk costs refer to costs that have already been incurred.
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True. If the costs of an investment are high, we might become reluctant to dump it due to how much we have put into it.
6.
Self-handicapping bias occurs when we try to explain any possible future poor performance with a reason that may or may not be true.
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True. In other words, its like making excuses beforehand.
7.
With regard to investing behavior, mental accounting refers to following the crowd.
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False. Mental accounting refers to keeping ones money in different buckets for different purposes.
8.
Investors who exhibit "herding" behavior tend to think that other investors have more information than they do.
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True. Herding refers to investing along with the crowd. This usually entails believing that others have information that you dont.
9.
A way to describe the psychological concept of loss aversion is this: strongly preferring to avoid losses over acquiring gains.
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True. This behavior can in some cases cause you to lose money.
10.
In investing, overconfidence means thinking that we are more capable than we really are.
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True. Overconfidence is an unhealthy extension of confidence.