Basics Beginner: Psychology and Investing

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1.
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.
2.
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.
3.
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.
4.
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.
5.
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.
6.
A way to describe the psychological concept of loss aversion is this: strongly preferring to avoid losses over acquiring gains.
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True. This behavior can in some cases cause you to lose money.
7.
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.
8.
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.
9.
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.
10.
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.