Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
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.
3.
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.
4.
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.
5.
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.
6.
What does overconfidence in investing often lead to?
Rapid trading. Overconfident investors trade more rapidly because they think they know more than those on the opposite end of the trade.
7.
An example of the psychological concept of loss aversion is _______.
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.
8.
Investors who exhibit "herding" behavior tend to think that other investors have more information than they do.
True. Herding refers to investing along with the crowd. This usually entails believing that others have information that you dont.
9.
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.
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 _______.
Cognitive dissonance. Because of the discomfort, you will need a way to resolve the dissonance.
