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.
Mental accounting is a psychological practice that refers to keeping our investments in good condition.
Choose wisely. There is only one correct answer.
False. Mental accounting really means putting our money in different buckets for different purposes. Its not always harmful, but sometimes it can inadvertently lead to wasteful spending.
2.
What does regret often lead to?
Choose wisely. There is only one correct answer.
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.
3.
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.
4.
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.
5.
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.
6.
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.
7.
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.
8.
What does representativeness lead to?
Choose wisely. There is only one correct answer.
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.
9.
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.
10.
Confirmation bias is a good investing practice to follow because it usually leads to good decisions.
Choose wisely. There is only one correct answer.
False. While it sometimes does, it can also deprive us of choosing other, potentially good opportunities.