Basics Beginner: Psychology and Investing

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1.
An example of the psychological concept of loss aversion is _______.
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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.
2.
Which of the following examples illustrates selective memory?
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Remembering only the successes. Selective memory, as a rule, selects those memories that we want to preserve.
3.
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.
4.
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.
5.
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.
6.
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.
7.
Self-handicapping bias occurs when we _______.
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Think of excuses before we do something to justify failure just in case it happens. These excuses can sabotage our performance.
8.
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.
9.
In investing, sunk costs refer to costs that have already been incurred.
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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.
10.
Mental accounting is a psychological practice that refers to keeping our investments in good condition.
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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.