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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.
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.
3.
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.
4.
A disadvantage of "anchoring" behavior in investing is that you might hold onto an investment longer than you should, given the fundamentals of the company behind it.
True. As an investor, you might stick with an investment in order to wait for a point at which it will be "worth it" to you, which might lead to a loss on it.
5.
The framing effect can lead you to treat buying decisions in relative terms.
True. This effect can affect the choices you make when you buy investments.
6.
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.
7.
In investing, overconfidence means thinking that we are more capable than we really are.
True. Overconfidence is an unhealthy extension of confidence.
8.
Mental accounting is a psychological practice that refers to keeping our investments in good condition.
False. Mental accounting really means putting our money in different buckets for different purposes. Its not always harmful, but sometimes it can inadvertently lead to wasteful spending.
9.
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.
10.
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.
