Basics Beginner: Psychology and Investing

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1.
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.
2.
Investors who exhibit "herding" behavior tend to think that other investors have more information than they do.
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True. Herding refers to investing along with the crowd. This usually entails believing that others have information that you dont.
3.
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 _______.
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Cognitive dissonance. Because of the discomfort, you will need a way to resolve the dissonance.
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.
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.
6.
What does anchoring often lead to?
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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.
7.
In the world of investing, what does overconfidence refer to?
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The ability to think that one is smarter than one really is. Overconfidence stretches normal confidence to unhealthy levels.
8.
In the psychology of investing, the "framing effect" refers to _______.
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Using a reference point to make investment decisions. Because this reference point can be subjective, it can lead to some rash decisions.
9.
Confirmation bias is the practice of _______.
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Giving preference to information that supports what we already believe. This practice can sometimes limit our success with investing by shutting out other opportunities.
10.
An example of sunk costs is _______.
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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.