Home > Investing Basics > Beginner
Investing Basics Beginner: Psychology and Investing

Test your knowledge

Choose wisely. There is only one correct answer to each question.

0%
Keep studying!
Review your answers below to learn more.
1.
The sunk costs fallacy refers to _______.
Choose wisely. There is only one correct answer.
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.
2.
What does representativeness lead to?
Choose wisely. There is only one correct answer.
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.
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.
Choose wisely. There is only one correct answer.
True. In other words, its like making excuses beforehand.
4.
In investing, overconfidence means thinking that we are more capable than we really are.
Choose wisely. There is only one correct answer.
True. Overconfidence is an unhealthy extension of confidence.
5.
The practice of herding refers to _______.
Choose wisely. There is only one correct answer.
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.
6.
A way to describe the psychological concept of loss aversion is this: strongly preferring to avoid losses over acquiring gains.
Choose wisely. There is only one correct answer.
True. This behavior can in some cases cause you to lose money.
7.
What does anchoring often lead to?
Choose wisely. There is only one correct answer.
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.
8.
With regard to investing behavior, mental accounting refers to following the crowd.
Choose wisely. There is only one correct answer.
False. Mental accounting refers to keeping ones money in different buckets for different purposes.
9.
Confirmation bias is the practice of _______.
Choose wisely. There is only one correct answer.
Giving preference to information that supports what we already believe. This practice can sometimes limit our success with investing by shutting out other opportunities.
10.
What is a good way as an investor to avoid falling prey to the framing effect?
Choose wisely. There is only one correct answer.
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.