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Title: Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics by Gary Belsky, Thomas Gilovich ISBN: 0-684-85938-6 Publisher: Simon & Schuster Pub. Date: 06 April, 2000 Format: Paperback Volumes: 1 List Price(USD): $12.00 |
Average Customer Rating: 4.16 (32 reviews)
Rating: 5
Summary: Nonrational Economics Explained
Comment: 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!
Rating: 4
Summary: Behavioral Economics Explained Quite Well
Comment: I have a Ph.D. in economics and a bachelor's degree in psychology. I've always found the fields of behavioral economics and experimental economics rather fascinating and wished to know more about the results of their research. So when I was shopping for a retirement investment guide recently I saw this book in the personal finance section and purchased it as well.
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.
Rating: 2
Summary: Overated Book
Comment: While some of the book is interesting it is more geared for the beginner in investing. A lot of the issues brought up are nothing more than common sense. I read it in a couple of days and felt let down by the simplistic approach to investing problems and the suggested solutions.
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Title: The Winner's Curse by Richard H. Thaler ISBN: 0691019347 Publisher: Princeton Univ Pr Pub. Date: 10 January, 1994 List Price(USD): $18.95 |
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Title: Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin ISBN: 0195161211 Publisher: Oxford University Press Pub. Date: August, 2002 List Price(USD): $39.95 |
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Title: How We Know What Isn't So by Thomas Gilovich ISBN: 0029117062 Publisher: Free Press Pub. Date: 05 March, 1993 List Price(USD): $17.95 |
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Title: Advances in Behavioral Finance by Richard H. Thaler ISBN: 0871548445 Publisher: Russell Sage Foundation Pub. Date: June, 1993 List Price(USD): $21.95 |
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Title: Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb ISBN: 1587990717 Publisher: Thomson Texere Pub. Date: October, 2001 List Price(USD): $27.95 |
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