The Warren Buffett Way Workbook

Chapter 6

The Psychology of Investing

Answers to Multiple-Choice Questions

1. D. When it comes to investment decisions, people often act irrationally. This behavior can be described as erratic, often contradictory, and occasionally goofy.

2. D. The study of psychology of misjudgment is every bit as valuable to an investor as the analysis of a balance sheet and an income statement. Unfortunately for a majority of investors, they are usually unaware of their bad decisions.

3. B. Benjamin Graham figured that an investor’s worst enemy is not the stock market but oneself. They might have superior abilities in mathematics, finance, and accounting, but people who cannot master their emotions are ill suited to profit from the investment process.

4. D. Buffett stated that there are three important principles to Graham’s investment approach. First is to look at stocks simply as businesses, second is to adopt the margin of safety concept, and finally, one should have a correct mental approach to the markets.

5. A. Behavioral finance is an investigative study that seeks to explain market inefficiencies by using psychological theories.

6. B. According to several psychological studies, errors in judgment occur because people in general are overconfident regarding their abilities. Most people believe they are of above-average intelligence or better-than-average drivers.

7. C. Thaler points out that people put too much emphasis on a few chance events, thinking that they spot a trend. Investors ...