Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
Mental accounting refers to _______.
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.
3.
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.
4.
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.
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.
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.
7.
What is a good way as an investor to avoid falling prey to the framing effect?
Consider the total return of your investments. Seeing your choice in terms of the total return can help you avoid framing it in relative terms, which can be costly.
8.
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.
9.
In investing, self-handicapping might be considered the opposite of _______.
Overconfidence. Self-handicapping involves looking for excuses beforehand to explain why something might not work. If it indeed does not work, we have handicapped ourselves.
10.
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.
