Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics (Paperback)

by Gary Belsky (Author), Thomas Gilovich (Author) "By the third day of their honeymoon in Las Vegas, the newlyweds had lost their $1,000 gambling allowance..." (more)
Key Phrases: herd investing, sunk cost fallacy, decision paralysis, Richard Thaler, Core Growth, Dow Jones Industrial Average (more...)

Editorial Reviews

Amazon.com Review
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." --Howard Rothman --This text refers to an out of print or unavailable edition of this title.

Review
Beth Kobliner author of Get a Financial Life This is a terrific book. Belsky and Gilovich tackle financial decisions from the inside out...sweeping away the psychological obstacles that stand in the way of our goals. -- Review

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Product Details

• Paperback: 224 pages
• Publisher: Simon & Schuster; Fireside ed edition (April 6, 2000)
• Language: English
• ISBN-10: 0684859386
• ISBN-13: 978-0684859385
• Product Dimensions: 8.3 x 5.4 x 0.6 inches
• Shipping Weight: 8 ounces (View shipping rates and policies)
• Average Customer Review: 4.4 out of 5 stars See all reviews (48 customer reviews)
• Amazon.com Sales Rank: #39,424 in Books (See Bestsellers in Books)

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Customer Reviews

Most Helpful Customer Reviews

114 of 117 people found the following review helpful:

5.0 out of 5 stars Nonrational Economics Explained, May 11, 2000

By	Professor Donald Mitchell "Jesus Makes Me a P... (Boston) - See all my reviews (TOP 10 REVIEWER)

This review is from: Why Smart People Make Big Money Mistakes--and How to Correct Them: Lessons from the New Science of Behavioral Economics (Hardcover)

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!

73 of 77 people found the following review helpful:

4.0 out of 5 stars Behavioral Economics Explained Quite Well, April 30, 2003

By	emcentar "emcentar" (Washington, DC) - See all my reviews

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.

43 of 44 people found the following review helpful:

4.0 out of 5 stars lightweight but overall pretty decent, April 16, 2001

By	Justus Pendleton (Colorado Springs, CO United States) - See all my reviews (REAL NAME)

This review is from: Why Smart People Make Big Money Mistakes--and How to Correct Them: Lessons from the New Science of Behavioral Economics (Hardcover)

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.