- Paperback: 224 pages
- Publisher: Simon & Schuster; Fireside ed edition (April 6, 2000)
- Language: English
- ISBN-10: 0684859386
- ISBN-13: 978-0684859385
- Product Dimensions: 8.5 x 5.6 x 0.5 inches
- Shipping Weight: 8 ounces
- Average Customer Review: 4.2 out of 5 stars See all reviews (61 customer reviews)
- Amazon Best Sellers Rank: #603,564 in Books (See Top 100 in Books)
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Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics Fireside ed Edition
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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 --This text refers to an out of print or unavailable edition of this title.
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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Top Customer Reviews
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!
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.
The authors discuss a number of ideas learned from psychologists about how people make purchases, value money, and make foolish mistakes on a daily basis. Some of the concepts include “Mental Accounting,” “Loss Aversion,” “Regret Aversion,” “Anchoring,” and “Sunk Cost Fallacy.” Among the more prosaic concepts are “The Herd Mentality,” “The Ego Trap,” “Brand Loyalty,” and “The Fizzbo Fallacy.”
Financial mistakes can be lessened or avoided altogether by getting a second opinion, being wary of “expert advice,” questioning everything, being skeptical of statistics, avoiding optimism, not following the latest trend, treating all money as equal (as “earned income,” whether won in a poker game, found on the street, a tax return, a bonus check, etc.), and by not throwing good money after bad. The authors discuss these matters and many more in detail, and how it can help you financially over the long haul. Knowledge is power, but too much knowledge can be destructive. One example: people who follow the stock market day-to-day do less well than those who pay less attention. Among the things you can do immediately: raise your insurance deductible, switch to index funds, pay off your credit cards with your emergency savings, set up a payroll deduction plan, and diversify your investments. You can do these things without reading the book, and learn so much more if you do. Bottom line: be wary, know yourself, and you’ll save yourself a lot of grief (and money). Five stars.
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