Tag Archives: Personal Finance

Why Smart People Make Big Money Mistakes

19 Oct

Why Smart People Make Big Money Mistakes - Book CoverDespite my general inability to get past page two of nonfiction books on topics like personal finance, I recently finished reading Why Smart people Make Big Money Mistakes: and how to correct them by Gary Belsky and Thomas Gilovich.

For brevity’s sake, and because time is short, I will refrain from a full review of the book. Rather, I will provide a few quick highlights that I found most personally relevant, and encourage you to read full reviews or even pick up a copy if you find these compelling.

To give quick context, the book is written from the perspective of behavioral economics, which studies the sociological and psychological reasons for our economic decisions. It makes a strong case that while many of us may think that we are financially savvy, that we in fact make many financial decisions due to social and psychological pressures rather than purely objective, rational ones.

The book outlines several fallacies and important lessons:

  • All Dollars are Created Equal: If you spend your bonus check or tax refund more easily than your regular salary, or if you invest your inheritance, retirement or education savings more conservatively than the rest of your portfolio (and are several years from needing these things) you are likely losing money.  A dollar of inheritance money has the same buying power as a dollar of your salary or a dollar from your lucky lottery winnings – so they ought all be spent or invested by the same criteria and consideration.
  • Loss aversion and the Sunk Cost Fallacy: Do you sell your “winning” stocks in order to lock-in the gain, but hold your “losers” in hopes that they will rebound?  Are you throwing good money after bad?
  • Bigness Bias: Would you not spend an extra $50 on your $200 domestic plane ticket to fly a specific airline, but don’t mind spending $100 extra to fly your preferred airline if its a $900 international ticket? Extra charges look smaller when they are wrapped into big purchases, but still cost you the same amount of money.
  • Ego Trap: Do you think that you can outperform the market with your smart stock picking techniques? Do you think that you’re doing pretty well with your investment return in the last year, but not actually know how much the overall market grew in that same time? You may not know as much as you think you do – the law of averages will beat you more often than you likely want to know.

See good reviews at Get Rich Slowly and The Simple Dollar.

For Your Reading List: Why Smart People Make Big Money Mistakes

12 Aug

Why Smart People Make Big Money MistakesI had a fabulous lunch today with my former coworker and friend, Andre Medeiros. Our conversation turned to investing and he recommended a book, Why Smart People Make Big Money Mistakes — And How to Correct Them by Gary Belsky and Thomas Gilarch. Both he and his wife Christine vouch for the book’s readability, so I think I might just pick up a copy next time I find myself in a bookstore.

Editorial Review from Amazon.com:

Why do so many otherwise rational individuals make irrational decisions when it comes to money? Financial journalist Gary Belsky and Cornell University psychology professor Thomas Gilovich contend the answers can be found–and the deficiencies remedied–with help from a relatively new science called behavioral economics. Still largely unknown outside academic circles, the field can be traced to research on the impact of rewards and punishments on human judgment and decision- making that first were undertaken at Jerusalem’s Hebrew University some 30 years ago. In Why Smart People Make Big Money Mistakes , Belsky and Gilovich update this pioneering work and show readers how to understand exactly why they invest, spend, and save as they do. More importantly, using examples that everyone can identify with and language that anyone can understand, the authors offer dozens of workable suggestions that can help readers manage their money better. “We believe that by identifying the psychological causes behind many types of financial decisions,” they write, “you can effectively change your behavior in ways that will ultimately put more money in your pocket and help you keep more of what you already have.”