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Why Smart People Make Big Money Mistakes--and How to Correct Them: Lessons from the New Science of Behavioral Economics Hardcover – January 5, 1999
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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
David Dreman Chairman, Dreman Value Management, and author of Contrarian Investment Strategies A lucid introduction to the field of behavioral finance for anyone interested in the critical and yet almost entirely concealed role of psychology in making investment decisions. -- Review
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This book pointed out many of my problems that I had and still have. I was very surprised to find that I succumbed to many of the problems that Belsky says are the root of many people's money problems. For example, treating money in different accounts differently and treating differently money that's earned in different ways. For example, I have always had a savings account that I use only for emergencies, so treated this money as sacred. Also, any money I've ever won gambing or been given as a gift, I spent more freely than money I earned as income.
Belsky, rightly, points out the foolishness of this. A dollar earned doesn't buy any less or more than a dollar won or received as a gift, so why treat it differently. One thing that I have learned is that any money that you can set aside in savings is money that should be used to pay off credit cards. Money sitting in an account isn't really doing that much for you, but balances on a credit card will eat at any attempts you make on getting your finances in order. This took me a long time to learn (see first sentence in review). I, finally, had to cut up my credit cards, then I drained my savings to pay off as much as I could, then paid off the rest as fast as possible.
I have a dividing interest in economics, but that science is limited due to the basic assumptions it makes. This is why behavioral economics was developed. Behavioral economics takes a stab at filling in the gaps the micro and macroeconomics just can't answer. Belsky gives a lucid account of current findings.
If you are having problems figuring out what's wrong with your finances (i.e., your money habits) you need to read this book. Learning the hard way is too expensive. And the hard way won't teach you everything you should know and you might learn the wrong lesson.
As a fan of index funds, I enjoyed reading this book's explanation and recommendation for suggesting index funds.
This book is very readable and is an excellent primer on the major concepts which are emerging from behavioral finance research.
Socrates was right when he uttered his famous quote "Know Thy Self". One of the hardest things to do is to understand why we do what we do sometimes. This book helps explain some of this natural human behavior, and how we can manage it to make more rational financial decisions.
I would suggest companion books to supplement this book including:
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing
The one downside of this book is I bought it while looking to start investing, and it fails to touch upon asset allocation. The book does a good job of explaining why to use a market index approach, but doesn't detail allocating a blend of index funds to balance your level of risk.
Worth the read, but you'll probably need some follow-on material if you're looking to get into the market.
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