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Stocks 407: Psychology and Investing

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1.
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.
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.
In investing, overconfidence means thinking that we are more capable than we really are.
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True. Overconfidence is an unhealthy extension of confidence.
4.
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.
5.
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.
6.
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.
7.
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.
8.
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.
9.
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.
10.
With regard to investing behavior, mental accounting refers to following the crowd.
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False. Mental accounting refers to keeping ones money in different buckets for different purposes.