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Investing Basics Beginner: Psychology and Investing

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1.
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.
2.
Confirmation bias is the practice of _______.
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Giving preference to information that supports what we already believe. This practice can sometimes limit our success with investing by shutting out other opportunities.
3.
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.
4.
In the psychology of investing, the "framing effect" refers to _______.
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Using a reference point to make investment decisions. Because this reference point can be subjective, it can lead to some rash decisions.
5.
What does regret often lead to?
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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.
6.
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.
7.
What does anchoring often lead to?
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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.
What does investing with the crowd often lead to?
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Choosing investments that are inappropriate for your goals. Following investment fashion can lead to fading performance or inappropriate investments for your particular goals.
9.
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.
10.
An example of sunk costs is _______.
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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.