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Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics Paperback – April 6, 2000
In this fascinating investigation of the ways we spend, invest, save, borrow, and waste money, Gary Belsky and Thomas Gilovich reveal the psychological causes -- the patterns of thinking and decision making -- of irrational behavior. Most important, they focus on the decisions we make every day and, using entertaining examples, provide invaluable tips on avoiding the financial faux pas that can cost thousands of dollars each year.
About the Author
Thomas Gilovich is a professor of psychology at Cornell University and author of How We Know What Isn't So. He lives in Ithaca, New York.
- Publisher : Simon & Schuster; Fireside Ed edition (April 6, 2000)
- Language : English
- Paperback : 224 pages
- ISBN-10 : 0684859386
- ISBN-13 : 978-0684859385
- Item Weight : 13.8 ounces
- Dimensions : 5.5 x 0.75 x 8.5 inches
- Best Sellers Rank: #477,705 in Books (See Top 100 in Books)
- Customer Reviews:
About the authors
Top reviews from the United States
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People don't act like computers when making economic decisions. Our minds act much more like broken-down wheels stuck in muddy ruts, instead.
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, whether these are good rules or not, and the results are costly to us.
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 both books, 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). I could drink better wines at home for less money. Now, how dumb is that?
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!
I also suggest that you examine where you have rules of thumb in noneconomic areas. When you are busy and someone in the family wnats your attention, what do you do? Your choices may be costing you closer relationships and effectiveness. Take the time to make good decisions and at least adopt better rules of thumb!
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.
Top reviews from other countries
You can get confused by so much Pscho analysis, I would say if you know what works for you, stick to it.
And you can gradually add more to it to grow financially. And finally, as the title says, Why smart people make money mistakes I am taking out the word (BIG). As it is taking into assumption that you have money already.
Anyway I like it.