Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
The practice of herding refers to _______.
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.
3.
In the world of investing, what does overconfidence refer to?
The ability to think that one is smarter than one really is. Overconfidence stretches normal confidence to unhealthy levels.
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.
When you judge an investment by objective standards rather than your own personal ones, you are practicing what is called "anchoring."
False. Anchoring is the other way around, and in some cases it can lead to costly losses.
6.
What does regret often lead to?
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.
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.
Mental accounting refers to _______.
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.
9.
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.
10.
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.
