Why Smart People Make Big Money Mistakes--And How to Correct Them: Lessons from the New Science of Behavioral Economics

This book is one of the 10 best investing books of 1999 and 2000. 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!

This book is a must for anyone who wants to improve his/her financial life. The authors introduce technical terms pert to behavioral economics in so skilled a manner and with so many anectodes to help understanding, that this book is a very easy read. It is extremely easy to identify oneself with many (if not all) of the financial situations described in the book.The fallacies of discriminating money based on its source, the aversion we have to losses, the over-confidence on the part of the common investor are all highlighted with solid research findings to support their conclusions. After reading this book I realised many of the errors I have made in the past while handling money. I would highly recommend this book to anyone, irrespective of financial status, who is interested in self improvement. This is a must read!

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!

Hi:This book is probably the best book I have read in the last five years. It takes what some may consider to be a relatively complicated area, behavioral finance, and breaks it down into easily understandable concepts. It is a quick, easy read and is absolutely fascinating. I would strongly recommend this book and have already read it twice myself. Andrew Stoltmann

WHY SMART PEOPLE MAKE BIG MONEY MISTAKES is full of examples of decisions you might have to make. You get to choose an option, and then the authors tell you what you should have chosen. This is a great learning technique to bring home the lessons of this superb book. The authors point out several biases that most people have about money (such as it's okay to blow certain money, but not other money -- all money is really the same), themselves (people always overrate their abilities and get taken as a result), and circumstances (even people who got an A in statistics will usually misanalyze the risks they take). Since money is ultimately about math, a lot of your lifetime income and earning potential is lost in the process of following these biases. This book could make or save you a million dollars. You cannot afford not to read it. I was reminded of a parallel book on the same sorts of problems about bad thinking habits as they apply to work situations called "The 2,000 Percent Solution" which you should also read. If you use the lessons of both books, you will be enormously better off financially in your lifetime. It'll be like owning the casino, instead of losing money in it. Good luck!