Basics Beginner: Psychology and Investing

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1.
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.
2.
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.
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.
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.
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.
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.
7.
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.
8.
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.
9.
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.
10.
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.