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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.
Mental accounting is a psychological practice that refers to keeping our investments in good condition.
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False. Mental accounting really means putting our money in different buckets for different purposes. Its not always harmful, but sometimes it can inadvertently lead to wasteful spending.
3.
In investing, sunk costs refer to costs that have already been incurred.
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True. If the costs of an investment are high, we might become reluctant to dump it due to how much we have put into it.
4.
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.
5.
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.
6.
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.
7.
Self-handicapping bias occurs when we try to explain any possible future poor performance with a reason that may or may not be true.
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True. In other words, its like making excuses beforehand.
8.
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.
9.
A way to describe the psychological concept of loss aversion is this: strongly preferring to avoid losses over acquiring gains.
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True. This behavior can in some cases cause you to lose money.
10.
What is a good way as an investor to avoid falling prey to the framing effect?
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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.