Why Smart People Make Big Money Mistakes
Gary Belsky and Thomas Gilovich
The book proceeds by discussing several realties of behavioral economics, like why a tax return feels like a windfall payment. Why the value of money is less when more is on the line, like $5 more for a car vs. a CD. The intent is to assist the reader in stepping away from such faults and make smarter decisions. The book goes on to make a series of suggestions to improve ones personal financial situation.
The Ego trap reminds us that we are not as smart as we think we are and we need to be mindful of that. We remember past success better than past failures. It is important that we learn detailed lessons from past failures. We can temper optimism with prior experience, but in general, we don’t learn well enough from our past mistakes.
A good rule for adjusting for over confidence is by taking 25% of the high estimate and adding 25% to the down estimate. Like, think you could make $1000, thing again to $750, think you could only loose $1000, think losing $1250.
Principals to Ponder:
Every dollar spends the same
Losses hurt you more than gains please you
Money that’s spent is money that doesn’t matter
It’s all in the way you look at it
All numbers count, even if you don’t like to count them
You probably pay too much attention to things that matter too little
Your confidence is often misplaced
It’s hard to admit mistakes
The trend may not be your friend
You can know too much
Steps to take:
Raise you insurance deductible
Self insure against small losses
Pay off credit card debt with emergency funds
Switch to index funds
Diversify your investments
Review your assets
Max out on retirement plans
Set up a payroll deduction plan
Keep Track (of how you spend money and where it is)
