Reading Corner: A Review of Why Smart People Make Big Money Mistakes
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If you think you have a firm handle on your emotions and thought patterns when it comes to personal finance, here’s a book that will make you think again. A few years ago, I had the eye-opening experience of reading Why Smart People Make Big Money Mistakes and How to Correct Them by Gary Belsky and Thomas Gilovich. I liked it so much that I read it again recently and wanted to share it here on Reading Corner.
The book is packed full of educational and entertaining information on behavioral finance, which is an area of study that seeks to understand how psychology and essentially being human affect financial decision-making. Not only that, but the authors provide real-life examples of what we are (or at least I am) doing wrong and actionable steps to optimize your everyday money management.
While reading the book, I had so many “ah-ha” moments. I can’t recall how many times I said “Uh-oh! I do that” about some irrational behavior. One example is the unequal mental accounting of funds. Have you ever held on to the $50 you worked so hard to earn but freely spent the $50 gift card that you won or were gifted? Or have you ever been quick to spend a $100 work bonus but put a $100 tax rebate in the bank? Hand raised, I certainly have. While not exactly wrong, the authors state that a dollar is a dollar, so hard-earned money should be valued as equally as money easily gained.
Why is this? Because unequal mental accounting of funds can cause you to miss out on opportunities to improve your financial situation. Some examples include valuing retirement funds as so sacred that a person picks the most conservative 401(k) plan offered or missing the opportunity to invest when it arises due to holding on too tightly to inherited money.
The authors follow up with warning signs in the form of bullet points to help you recognize if you engage in mental accounting and provide suggestions on how to overcome it. This format remains consistent for every chapter, making it easy to determine what irrational thoughts you fall prey to and how to improve on them.
The book covers many more concepts than I can elaborate on here. Here are a few more concepts and how I’ve changed my everyday life now that I recognize them. Did you know that…
- Too many choices leads to delayed decision-making or making no decision at all? Cutting back on options has helped me decide on a credit card and where to vacation next much faster. My friend gave herself two choices of wedding caterers and saved herself time and wedding-planning anxiety.
- We tend to place a higher monetary value on items when they are ours versus when they belong to others? Recognizing this has helped me price items more reasonably when I sell on eBay, Poshmark, and other sites.
- We tend to overlook small numbers but they can add up over time? Small numbers such as small percentage differences in the expense ratios of two different mutual funds or a few dollars on a coffee and snack a day add up to losses over time. I reviewed some expense ratios recently and cut back on hot cocoa runs this winter. I started making hot cocoa a lot more often at home.
One more thing to point out is that the authors don’t chastise but educate readers so that they can move forward making better decisions. I know that after reading the book, I wanted to hit myself over the head because I realized how many irrational things I had done in the past. But the authors’ last piece of advice is to go easy on yourself. After all, we’re humans and not robots, so we’re not going to act logically and rationally at every decision-making opportunity.
If you find behavioral finance fascinating or simply want to learn how to make better financial decisions, this book will help you do both of those things. The book is useful for everyone from those who are financially savvy to the financial beginner. The authors provide research data and actionable content for all readers to use in real life. The book is also an easy and entertaining read.
My mindset and decision-making skills have changed for the better since reading Why Smart People Make Big Money Mistakes. I hope you find it valuable too.
Have you read Why Smart People Make Big Money Mistakes and How to Correct Them? What did you think of it?