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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.
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.
3.
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.
4.
The practice of herding refers to _______.
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Going along with the crowd. This is the practice of buying and selling based on the fact that it is popular to do so at the time.
5.
What does overconfidence in investing often lead to?
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Rapid trading. Overconfident investors trade more rapidly because they think they know more than those on the opposite end of the trade.
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.
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.
8.
When you judge an investment by objective standards rather than your own personal ones, you are practicing what is called "anchoring."
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False. Anchoring is the other way around, and in some cases it can lead to costly losses.
9.
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.
10.
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.