Basics Beginner: Psychology and Investing

Test your knowledge

Choose wisely. There is only one correct answer to each question.

0%
Keep studying!
Review your answers below to learn more.
1.
In investing, sunk costs refer to costs that have already been incurred.
Choose wisely. There is only one correct answer.
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.
2.
Mental accounting refers to _______.
Choose wisely. There is only one correct answer.
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.
3.
A way to describe the psychological concept of loss aversion is this: strongly preferring to avoid losses over acquiring gains.
Choose wisely. There is only one correct answer.
True. This behavior can in some cases cause you to lose money.
4.
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 _______.
Choose wisely. There is only one correct answer.
Cognitive dissonance. Because of the discomfort, you will need a way to resolve the dissonance.
5.
What is a good way as an investor to avoid falling prey to the framing effect?
Choose wisely. There is only one correct answer.
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.
6.
In investing, overconfidence means thinking that we are more capable than we really are.
Choose wisely. There is only one correct answer.
True. Overconfidence is an unhealthy extension of confidence.
7.
In investing, self-handicapping might be considered the opposite of _______.
Choose wisely. There is only one correct answer.
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.
8.
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.
Choose wisely. There is only one correct answer.
True. Though its not always a bad thing, investing against the reality of the company can sometimes be detrimental.
9.
What does anchoring often lead to?
Choose wisely. There is only one correct answer.
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.
10.
The practice of herding refers to _______.
Choose wisely. There is only one correct answer.
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.