Basics Beginner: Psychology and Investing

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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."
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False. Anchoring is the other way around, and in some cases it can lead to costly losses.
2.
In the world of investing, what does overconfidence refer to?
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The ability to think that one is smarter than one really is. Overconfidence stretches normal confidence to unhealthy levels.
3.
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 _______.
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Cognitive dissonance. Because of the discomfort, you will need a way to resolve the dissonance.
4.
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.
5.
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.
6.
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.
7.
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.
8.
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.
9.
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.
10.
Confirmation bias is a good investing practice to follow because it usually leads to good decisions.
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False. While it sometimes does, it can also deprive us of choosing other, potentially good opportunities.