Psychology

Question 1

Overconfidence

Answer 1

leads people to overestimate their knowledge, underestimate risks and exaggerate their ability to control events and predict outcomes.

Question 2

Illusion of control

Answer 2

common in day trading, sports betting

Question 3

Persuasion Bias

Answer 3

susceptibility to making decisions based on social influence and the repetition of information

Question 4

Recency Bais/Effect

Answer 4

Recency bias can make investors focus more on the most current events, leading to faulty predictions that this is always how it will always be.

tendency to best remember the information that was presented last

last item
closing argument

Question 5

Regret Aversion

Answer 5

Crippling effect that comes form fearing a negative outcome

regret-averse people avoid making a decision altogather

Question 6

Representatives Heuristic

Answer 6

Labeling something because of it’s connection to a larger group with similar characteristics

Question 7

Salience Bias

Answer 7

Tendency to focus on highly emotional events/information and be impacted by it

Question 8

Status Quo Bias

Answer 8

Seek-out the path of least resistance; primitive survival instinct

Question 9

Sunk-cost Fallacy

Answer 9

Tendency to follow-through on something even though the costs outweigh the benefits

Question 10

Loss Aversion

Answer 10

Loss hurts more than wins so we become risk-averse

Question 11

Gambler’s Fallacy

Answer 11

We think future possibilities are affected by past events

Question 12

Law of Small Numbers Bias

Answer 12

bias of making generalization form a small sample size

Question 13

Familiarity Bias

Answer 13

Familiarity leads to home bias and single stock concentration.

Question 14

Endowment Effect

Answer 14

a cognitive bias that describes the tendency of people to value items they own more than similar items they do not own.

Question 15

Mental Accounting

Answer 15

can lead to naïve diversification (i.e., the assumption that simply investing in enough unrelated assets will reduce risk sufficiently to make a profit).

Question 16

Disposition Effect

Answer 16

People seek pride and avoid regret

Sell winners too quickly (confirms correct choice)

Hold losers too long (avoids confirming incorrect choice)

Question 17

Bandwagon Effect

Answer 17

Ideas, fads, and beliefs grow as more people adopt them

Question 18

Availability Bias

Answer 18

We rely on immediate examples that come to mind while making judgements

Question 19

Affinity Bias

Answer 19

tendency to favor people who share similar interests, backgrounds and experiences with us

Question 20

Factors leading to overconfidence:

Answer 20

Choice
Task familiarity
Information (confirmation bias)
Active involvement
Past success

Question 21

Heuristic

Answer 21

any approach to problem-solving that employs a more practical method that is not guaranteed to be optimal or rational, but is sufficient for reaching a short-term goal or approximation.

Examples: Rules of thumb, educated guesses, and trial & error.

Heuristics reduce the cognitive load of decision making.

This ease allows biases to cloud objectivity.

Question 22

Anchoring

Answer 22

is where an investor sets a value at the initial point of information (typically their buy price).

Question 23

Prospect theory

Answer 23

People suffer more greatly from losses than they benefit from gains.

Question 24

When investors consider the past, they tend to suffer from

Answer 24

House money effect (take more risk)
Snakebite effect (take less risk)
Break-evenitis (take more risk)

Question 25

herd mentality

Answer 25

Leaning towards what everyone else is doing

We find comfort in groups/numbers.