Psychology

Question 1

Heuristic

Answer 1

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

Question 2

Anchoring

Answer 2

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

Question 3

Prospect theory

Answer 3

People suffer more greatly from losses than they benefit from gains

Question 4

Recency bias

Answer 4

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

Question 5

Overconfidence

Answer 5

overestimate their knowledge, underestimate risks and exaggerate their ability to control events and predict outcomes (stemming from choice, task familiarity, information, active involvement and past success)

Question 6

the disposition effect

Answer 6

seeking pride and avoiding regret:
1. selling winners too quickly (which confirms a correct choice)
2. holding losers for too long (which avoids confirming an incorrect choice)

Question 7

House Money Effect

Answer 7

taking more risk when reflecting on the past (profits)

Question 8

Snakebite Effect

Answer 8

taking less risk when reflecting on the past (losses)

Question 9

Break-evenitis

Answer 9

taking more risk when reflecting on the past (to get back to net zero)

Question 10

Mental accounting

Answer 10

different values a person places on the same amount of money based on subjective criteria

Question 11

naïve diversification

Answer 11

the assumption that simply investing in enough unrelated assets will reduce risk sufficiently to make a profit

Question 12

Home Bias

Answer 12

Familiarity and overweighting of country-specific stocks or single stocks

Question 13

Herd Mentality

Answer 13

the tendency for people’s behavior or beliefs to conform to those of the group they belong to