Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
In investing, overconfidence means thinking that we are more capable than we really are.
True. Overconfidence is an unhealthy extension of confidence.
3.
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.
4.
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.
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.
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.
7.
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.
8.
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.
9.
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.
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.
