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 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.
2.
With regard to investing behavior, mental accounting refers to following the crowd.
Choose wisely. There is only one correct answer.
False. Mental accounting refers to keeping ones money in different buckets for different purposes.
3.
An example of the psychological concept of loss aversion is _______.
Choose wisely. There is only one correct answer.
Holding onto a poorly performing stock. The fear of loss is so great in some people that they will hold on to stocks that are tanking badly, even when they see no real reason for it.
4.
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.
Choose wisely. There is only one correct answer.
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.
5.
Self-handicapping bias occurs when we _______.
Choose wisely. There is only one correct answer.
Think of excuses before we do something to justify failure just in case it happens. These excuses can sabotage our performance.
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.
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.
8.
The sunk costs fallacy refers to _______.
Choose wisely. There is only one correct answer.
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.
9.
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.
10.
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.