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1.
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.
2.
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.
3.
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.
4.
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.
5.
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.
6.
Confirmation bias is a good investing practice to follow because it usually leads to good decisions.
False. While it sometimes does, it can also deprive us of choosing other, potentially good opportunities.
7.
What does representativeness lead to?
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.
8.
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.
9.
An example of sunk costs is _______.
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.
10.
In the psychology of investing, the "framing effect" refers to _______.
Using a reference point to make investment decisions. Because this reference point can be subjective, it can lead to some rash decisions.
