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Stocks 407: Psychology and Investing

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1.
Mental accounting is a psychological practice that refers to keeping our investments in good condition.
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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.
2.
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.
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True. Though its not always a bad thing, investing against the reality of the company can sometimes be detrimental.
3.
Which of the following examples illustrates selective memory?
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Remembering only the successes. Selective memory, as a rule, selects those memories that we want to preserve.
4.
In investing, self-handicapping might be considered the opposite of _______.
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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.
5.
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.
6.
In investing, sunk costs refer to costs that have already been incurred.
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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.
7.
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.
8.
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.
9.
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.
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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.
10.
In the world of investing, what does overconfidence refer to?
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The ability to think that one is smarter than one really is. Overconfidence stretches normal confidence to unhealthy levels.