Choose wisely. There is only one correct answer to each question.
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1.
What does representativeness lead to?
Giving too much weight to recent performance. Representativeness is a mental shortcut that causes investors to give too much weight to recent evidence--such as short-term performance numbers--and too little weight to evidence from the more distant past. For instance, a look at a companys profit trends over the past six years is likely to yield more insight than looking at that companys stock performance over the past six months.
2.
An example of sunk costs is _______.
Holding on to a stock for too long because you have put a lot of money into it. When we have "sunk" money into something, we may be reluctant to let go of it when it turns into a loser.
3.
What does investing with the crowd often lead to?
Choosing investments that are inappropriate for your goals. Following investment fashion can lead to fading performance or inappropriate investments for your particular goals.
4.
Confirmation bias is the practice of _______.
Giving preference to information that supports what we already believe. This practice can sometimes limit our success with investing by shutting out other opportunities.
5.
What does overconfidence in investing often lead to?
Rapid trading. Overconfident investors trade more rapidly because they think they know more than those on the opposite end of the trade.
6.
Mental accounting refers to _______.
Keeping our money in different buckets for different purposes. While this practice is often beneficial, it can sometimes lead to wasteful spending depending on how we view those buckets.
7.
What is a good way as an investor to avoid falling prey to the framing effect?
Consider the total return of your investments. Seeing your choice in terms of the total return can help you avoid framing it in relative terms, which can be costly.
8.
Self-handicapping bias occurs when we try to explain any possible future poor performance with a reason that may or may not be true.
True. In other words, its like making excuses beforehand.
9.
What does anchoring often lead to?
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.
10.
A way to describe the psychological concept of loss aversion is this: strongly preferring to avoid losses over acquiring gains.
True. This behavior can in some cases cause you to lose money.
