Chapter 6

The Psychology of Investing

Multiple-Choice Questions

1. Which of the following terms can be associated with human behavior related to investment decisions?

I. Erratic

II. Contradictory

III. Goofy

A. I and II

B. II and III

C. I and III

D. I, II, and III

2. Which of the following are important aspects for investors to study with respect to their investment decisions?

I. The psychology of misjudgment

II. Balance sheet analysis

III. Income statements

A. I and II

B. II and III

C. I and III

D. I, II, and III

3. According to Benjamin Graham, what is an investor’s worst enemy?

A. Stock market fluctuation

B. Oneself

C. An inefficient market

D. Lack of information

4. According to Warren Buffett, which of the following is not an important principle in Benjamin Graham’s investing approach?

A. A correct attitude about investing

B. The margin of safety concept

C. Looking at stocks as a business

D. The ability to predict stock market bottoms

5. What term is used to describe the investigative study that seeks to explain market inefficiencies by using psychological theories?

A. Behavioral finance

B. Efficient market theory

C. Inefficient market theory

D. Behavioral inefficiency

6. According to several psychological studies, what trait is associated with errors in judgment?

A. Lack of complete information

B. Overconfidence

C. Underconfidence

D. Using bad information

7. Studies by Richard Thaler from the University of Chicago have demonstrated which behavioral finance trait that leads ...

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