Basics Beginner: Psychology and Investing

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1.
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.
2.
If you find yourself habitually buying shares of a company that has treated you well in the past, even when the data suggest it would be unwise, you could be operating under confirmation bias.
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True. Though its not always a bad thing, investing against the reality of the company can sometimes be detrimental.
3.
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.
4.
The practice of herding refers to _______.
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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.
5.
With regard to investing behavior, mental accounting refers to following the crowd.
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False. Mental accounting refers to keeping ones money in different buckets for different purposes.
6.
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.
7.
What does representativeness lead to?
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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.
8.
What does overconfidence in investing often lead to?
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Rapid trading. Overconfident investors trade more rapidly because they think they know more than those on the opposite end of the trade.
9.
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.
10.
In investing, self-handicapping might be considered the opposite of _______.
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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.