Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics
Why do so many otherwise sensible people make foolish financial choices? Why do so many investors sell great stocks just before they skyrocket or cling tenaciously to lousy ones until they plummet? Why do some Americans overpay when they buy a house while others reap too little when they sell their home? And why are many shoppers willing to spend more for a product bought on credit than with cash? Indeed, whether in the stock market, the real estate market, or the supermarket, most of us keep m
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Review by Professor Donald Mitchell for Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics
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People don’t act like computers when making economic decisions. This book is full of examples that show why people make miseconomic decisions. The basic point is that we have rules of thumb learned in daily life that we apply to economic decisions, and the results are costly.This book reminds me of Robert Cialdini’s excellent book, Influence, that explains the psychological biases that harm us as consumers and how to protect ourselves against unethical sellers. If you read and apply them both, you will have much more prosperity in your life. Here are some examples: We are all more careful about saving money in some areas than in others. For instance, I’ll go to great lengths to save money on air travel, but frequently buy expensive wines in restaurants (not a great value). Most of us are more concerned about avoiding losses than in making gains. This often translates into holding stocks with losses, rather than selling them, even if there is not much chance of a rebound. I know I’m guilty of this. Another example is assuming that we have knowledge that we really don’t have. Someone who is good in math may not take the time to mathematically evaluate the choices. For instance, a 15 year mortage on your home is only a little more costly per month than a 30 year mortgage. The different in the cost of the total interest you pay is enormous, yet almost everyone gets a 30 year mortgage. Almost everyone has the skill to compare the two choices, but few take the time to do so. This kind of stalled thinking can be irresistible, and your wallet will inevitably be lighter as a result. When you discover that you have a weakness in one of these areas, you can then be more cautious in avoiding your biases in the future. This book is very helpful in this regard because each chapter explore one bias and begins with a question to test your instincts. In answering that question, you will probably find (if you are like me) that you make the wrong choice. This book will return its cost in time and money hundreds of times over the rest of your life. Be sure to read and apply it!
Review by emcentar for Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics
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I have a Ph.D. in economics and a bachelor’s degree in psychology. I’ve always found the fields of behavioral economics and experimental economics rather fascinating and wished to know more about the results of their research. So when I was shopping for a retirement investment guide recently I saw this book in the personal finance section and purchased it as well.As a primer on the basic findings of behavioral economics, this book is great — interesting, well-explained, and much more fun to read than pouring through academic journals. It’s quite interesting to see that how we make money decisions is based as much on psychological principles (namely loss aversion, sunk costs and framing of the gain or loss) as on a rational calculation of cost and benefits. Also explained somewhat here are money mistakes that people make not because of emotional tainting of financial decisions but simply because they draw incorrect conclusions from incomplete calculations, such as not correcting for inflation in the housing market, not calculating total interest payments over the terms of different loans, not realizing the power of compound interest.While it’s a great book to explain certain irrational behaviors of your own and to explain a few financial chestnuts such as ignoring the financial pages, this book is not really an investment guide and is thin on suggestions for changing irrational behavior (other than realizing what you are doing will make you less likely to repeat the same mistakes).I would disagree with some reviewers who suggested that the book is insulting to their financial acumen. While it’s true that there are people who have been able to ‘beat the market’, the authors merely report studies suggesting that most people who choose their own investments under-perform the market, and why this happens (framing of investment decisions, emotional investing, loss aversion, sunk costs, etc.). I think that’s important information to have as an investor. If you choose your own investments, you will make smarter decisions by understanding understanding this research.
Review by Justus Pendleton for Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics
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I’m a little amazed at the reviews on this book. It isn’t nearly as good as most of the glowing five star reviews make it out to be. It is a fluffy book of around 200 pages that I read in a single day. It has maybe 10 main irrational behavior we exhibit when it comes to money. Even though it was only 200 pages I couldn’t help but feel that it could have been edited down substantially.On other hand, I’m even more amazed at the negative reviews. I’m not sure what the reviewers were expecting or whether they even read the same book I did. The book doesn’t attempt to explain everything. In the introduction it clearly explains that this is an attempt at a popular airing of some of the main findings of behavioral economics. Certainly there are some things you already knew, like our tendency to follow the herd or be paralyzed by indecision when faced with too many choices. But there are also things you might not have known, like how easily we “anchor” on completely random numbers.I wouldn’t have paid $20 for a hardcover copy of this book; I checked it out from the library. And I don’t begrudge the time I spent reading it because I learned something. And that’s really all you’re supposed to get from this little book.
Review by Loren G. Carlson for Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics
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WHY SMART PEOPLE MAKE BIG MONEY MISTAKES is full of examples of decisions you might have to make. You get to choose an option, and then the authors tell you what you should have chosen. This is a great learning technique to bring home the lessons of this superb book. The authors point out several biases that most people have about money (such as it’s okay to blow certain money, but not other money — all money is really the same), themselves (people always overrate their abilities and get taken as a result), and circumstances (even people who got an A in statistics will usually misanalyze the risks they take). Since money is ultimately about math, a lot of your lifetime income and earning potential is lost in the process of following these biases. This book could make or save you a million dollars. You cannot afford not to read it. I was reminded of a parallel book on the same sorts of problems about bad thinking habits as they apply to work situations called “The 2,000 Percent Solution” which you should also read. If you use the lessons of both books, you will be enormously better off financially in your lifetime. It’ll be like owning the casino, instead of losing money in it. Good luck!
Review by Satish Raghunath for Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics
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This book is a must for anyone who wants to improve his/her financial life. The authors introduce technical terms pert to behavioral economics in so skilled a manner and with so many anectodes to help understanding, that this book is a very easy read. It is extremely easy to identify oneself with many (if not all) of the financial situations described in the book.The fallacies of discriminating money based on its source, the aversion we have to losses, the over-confidence on the part of the common investor are all highlighted with solid research findings to support their conclusions. After reading this book I realised many of the errors I have made in the past while handling money. I would highly recommend this book to anyone, irrespective of financial status, who is interested in self improvement. This is a must read!