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.
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.
2.
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.
3.
In the psychology of investing, the "framing effect" refers to _______.
Choose wisely. There is only one correct answer.
Using a reference point to make investment decisions. Because this reference point can be subjective, it can lead to some rash decisions.
4.
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.
5.
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.
6.
Confirmation bias is the practice of _______.
Choose wisely. There is only one correct answer.
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.
Which of the following examples illustrates selective memory?
Choose wisely. There is only one correct answer.
Remembering only the successes. Selective memory, as a rule, selects those memories that we want to preserve.
8.
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.
9.
What does overconfidence in investing often lead to?
Choose wisely. There is only one correct answer.
Rapid trading. Overconfident investors trade more rapidly because they think they know more than those on the opposite end of the trade.
10.
Investors who exhibit "herding" behavior tend to think that other investors have more information than they do.
Choose wisely. There is only one correct answer.
True. Herding refers to investing along with the crowd. This usually entails believing that others have information that you dont.