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Stocks 407: Psychology and Investing

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1.
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.
2.
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.
3.
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.
4.
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.
5.
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.
6.
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.
7.
A way to describe the psychological concept of loss aversion is this: strongly preferring to avoid losses over acquiring gains.
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True. This behavior can in some cases cause you to lose money.
8.
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.
9.
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.
10.
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.