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Stocks 407: Psychology and Investing

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1.
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.
2.
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.
3.
Confirmation bias is the practice of _______.
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Giving preference to information that supports what we already believe. This practice can sometimes limit our success with investing by shutting out other opportunities.
4.
An example of the psychological concept of loss aversion is _______.
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Holding onto a poorly performing stock. The fear of loss is so great in some people that they will hold on to stocks that are tanking badly, even when they see no real reason for it.
5.
What does representativeness lead to?
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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.
6.
Self-handicapping bias occurs when we try to explain any possible future poor performance with a reason that may or may not be true.
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True. In other words, its like making excuses beforehand.
7.
What is a good way as an investor to avoid falling prey to the framing effect?
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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 investing with the crowd often lead to?
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Choosing investments that are inappropriate for your goals. Following investment fashion can lead to fading performance or inappropriate investments for your particular goals.
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.
With regard to investing behavior, mental accounting refers to following the crowd.
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False. Mental accounting refers to keeping ones money in different buckets for different purposes.