Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
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.
3.
The sunk costs fallacy refers to _______.
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.
4.
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.
5.
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.
6.
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.
7.
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.
8.
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 _______.
Cognitive dissonance. Because of the discomfort, you will need a way to resolve the dissonance.
9.
In investing, self-handicapping might be considered the opposite of _______.
Overconfidence. Self-handicapping involves looking for excuses beforehand to explain why something might not work. If it indeed does not work, we have handicapped ourselves.
10.
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.