Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
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.
3.
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.
4.
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.
5.
In the world of investing, what does overconfidence refer to?
The ability to think that one is smarter than one really is. Overconfidence stretches normal confidence to unhealthy levels.
6.
If you find yourself habitually buying shares of a company that has treated you well in the past, even when the data suggest it would be unwise, you could be operating under confirmation bias.
True. Though its not always a bad thing, investing against the reality of the company can sometimes be detrimental.
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.
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.
9.
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.
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.
