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Stocks 407: Psychology and Investing

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1.
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.
2.
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.
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.
Mental accounting refers to _______.
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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.
5.
What does regret often lead to?
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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.
6.
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.
7.
The sunk costs fallacy refers to _______.
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Being unable to ignore the sunk costs of an investment. Being unable to ignore these costs could lead to holding onto the investment well past the time to sell it.
8.
Self-handicapping bias occurs when we _______.
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Think of excuses before we do something to justify failure just in case it happens. These excuses can sabotage our performance.
9.
When you judge an investment by objective standards rather than your own personal ones, you are practicing what is called "anchoring."
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False. Anchoring is the other way around, and in some cases it can lead to costly losses.
10.
The practice of herding refers to _______.
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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.