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.
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.
2.
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.
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.
When you judge an investment by objective standards rather than your own personal ones, you are practicing what is called "anchoring."
Choose wisely. There is only one correct answer.
False. Anchoring is the other way around, and in some cases it can lead to costly losses.
5.
Self-handicapping bias occurs when we try to explain any possible future poor performance with a reason that may or may not be true.
Choose wisely. There is only one correct answer.
True. In other words, its like making excuses beforehand.
6.
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.
7.
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.
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.
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.
10.
An example of sunk costs is _______.
Choose wisely. There is only one correct answer.
Holding on to a stock for too long because you have put a lot of money into it. When we have "sunk" money into something, we may be reluctant to let go of it when it turns into a loser.