Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics

Customer Reviews

As a primer on the basic findings of behavioral economics, this book is great -- interesting, well-explained, and much more fun to read than pouring through academic journals. It's quite interesting to see that how we make money decisions is based as much on psychological principles (namely loss aversion, sunk costs and framing of the gain or loss) as on a rational calculation of cost and benefits. Also explained somewhat here are money mistakes that people make not because of emotional tainting of financial decisions but simply because they draw incorrect conclusions from incomplete calculations, such as not correcting for inflation in the housing market, not calculating total interest payments over the terms of different loans, not realizing the power of compound interest.

While it's a great book to explain certain irrational behaviors of your own and to explain a few financial chestnuts such as ignoring the financial pages, this book is not really an investment guide and is thin on suggestions for changing irrational behavior (other than realizing what you are doing will make you less likely to repeat the same mistakes).

I would disagree with some reviewers who suggested that the book is insulting to their financial acumen. While it's true that there are people who have been able to 'beat the market', the authors merely report studies suggesting that most people who choose their own investments under-perform the market, and why this happens (framing of investment decisions, emotional investing, loss aversion, sunk costs, etc.). I think that's important information to have as an investor. If you choose your own investments, you will make smarter decisions by understanding understanding this research.

Similar Products