Choose wisely. There is only one correct answer to each question.
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1.
Confirmation bias is a good investing practice to follow because it usually leads to good decisions.
False. While it sometimes does, it can also deprive us of choosing other, potentially good opportunities.
2.
In investing, overconfidence means thinking that we are more capable than we really are.
True. Overconfidence is an unhealthy extension of confidence.
3.
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.
4.
When you judge an investment by objective standards rather than your own personal ones, you are practicing what is called "anchoring."
False. Anchoring is the other way around, and in some cases it can lead to costly losses.
5.
In the psychology of investing, the "framing effect" refers to _______.
Using a reference point to make investment decisions. Because this reference point can be subjective, it can lead to some rash decisions.
6.
The practice of herding refers to _______.
Going along with the crowd. This is the practice of buying and selling based on the fact that it is popular to do so at the time.
7.
What does regret often lead to?
Making a bad sell decision because youve confused a bad outcome with a bad decision. You may feel regret after a bad outcome, such as a stretch of weak performance from a given stock, even if you chose the investment for all the right reasons and the underlying business remains strong. Regret can lead you to make a bad sell decision.
8.
In investing, sunk costs refer to costs that have already been incurred.
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.
9.
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.
10.
With regard to investing behavior, mental accounting refers to following the crowd.
False. Mental accounting refers to keeping ones money in different buckets for different purposes.
