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Stocks 407: Psychology and Investing

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1.
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.
2.
What does overconfidence in investing often lead to?
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Rapid trading. Overconfident investors trade more rapidly because they think they know more than those on the opposite end of the trade.
3.
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.
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.
An example of sunk costs is _______.
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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.
6.
Investors who exhibit "herding" behavior tend to think that other investors have more information than they do.
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True. Herding refers to investing along with the crowd. This usually entails believing that others have information that you dont.
7.
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.
8.
The framing effect can lead you to treat buying decisions in relative terms.
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True. This effect can affect the choices you make when you buy investments.
9.
What does anchoring often lead to?
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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.
10.
If you are holding two beliefs that are seemingly at odds with each other and you are uncomfortable doing so, then you are suffering from _______.
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Cognitive dissonance. Because of the discomfort, you will need a way to resolve the dissonance.