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

Why do so many otherwise smart people make foolish financial choices? Why do investors sell stocks just before they skyrocket -- and cling to others as they plummer? Why do shoppers overspend when using credit cards rather than cash? What do our habits of tipping or buying lottery tickets indicate about our relationship with money?

In this fascinating investigation of the ways we spend, invest, save, borrow, and waste money, Gary Belsky and Thomas Gilovich reveal the psychological causes -- the patterns of thinking and decision making -- of irrational behavior. Most important, they focus on the decisions we make every day and, using entertaining examples, provide invaluable tips on avoiding the financial faux pas that can cost thousands of dollars each year.

Why do so many otherwise rational individuals make irrational decisions when it comes to money? Financial journalist Gary Belsky and Cornell University psychology professor Thomas Gilovich contend the answers can be found--and the deficiencies remedied--with help from a relatively new science called behavioral economics. Still largely unknown outside academic circles, the field can be traced to research on the impact of rewards and punishments on human judgment and decision- making that first were undertaken at Jerusalem's Hebrew University some 30 years ago. In Why Smart People Make Big Money Mistakes , Belsky and Gilovich update this pioneering work and show readers how to understand exactly why they invest, spend, and save as they do. More importantly, using examples that everyone can identify with and language that anyone can understand, the authors offer dozens of workable suggestions that can help readers manage their money better. "We believe that by identifying the psychological causes behind many types of financial decisions," they write, "you can effectively change your behavior in ways that will ultimately put more money in your pocket and help you keep more of what you already have." --Howard Rothman

This book was written over a decade ago but the authors' points are applicable to anyone at any time. You can tell that these authors genuinely care about the reader and are seriously interested in adding value to their audience. Many of their points are from the research of Kahnemann and Tversky, two Israeli psychologists. Kahnemann won the Nobel prize for economics - unfortunately, Tversky died before he had a chance to share the prize. Economists, smartly, adopted many of the psychologists' research into their own field. Interestingly, their research could be applicable to other fields as well (ie: medicine), but so far I am not aware of any other academic field adopting their research as economists have.

The emphasis of this book is on humans' errors when it comes to money management. With regards to investing, the authors make a strong argument for investing in index funds as opposed to individual stocks or managed mutual funds. The strength of the book is pointing to readers their own irrationality when it comes to handling money. That is an extremely important point. When Charlie Munger (Warren Buffett's partner) was asked how they he was so successful at investing, he responded that he was rational. This is a delightful and fun book no matter what your financial situation. I am surprised that it is not more popular. Perhaps the cheesy title does not do it enough justice. Highly recommended even if you are not that interested in finance or money. Another related book: Dan Ariely's "Predictably Irrational".

One of the best books I have ever read. Very authentic and lucid.It has helped me clarify my financial decision making. Dr Anil Yadav, Delhi,India.

When it comes to money we do strange things that are not logical at all. For example, how many times did we hear somebody paying over 20% of interest on a credit card debt and at the same time hoarding cash in a savings account that earns us 1%? We probably heard this numerous times. The author does a great job describing all the little things that we do with our money that makes absolutely no sense. No matter how smart we are, this book makes us look in the mirror and realizes how illogical we are about some of our money decisions. I highly recommend this book.

Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

Though the copyright is a while ago, I dusted off this work and remembered much that I had forgotten ... worth re-reading every few years. This is a timeless piece since our emotional foibles have been with us since the beginning of human time.

A short review to say the book does exactly what the title suggests, Why and How. The chapters are neatly organized to explain the basic errors we make and why we make them. At the end of each is an explanation of warning signs to recognize you're falling for the mistake, how to think and what to do to correct your ways.

For something as important as how to deal with your money, this book couldn't be any simpler! There's no index, however, the table of contents essentially covers everything quite well.

What parts of your brain make you do what you do:

Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich by Jason Zweig

The effects on us from our emotions:

Irrational Exuberance by Robert J. Shiller

Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely

Pop! Why Bubbles Are Great For The Economy by Daniel Gross

And a practical budget book that shows you how to go about NOT budgeting - I bring it up for those who would like some automatic method to handle their money and not worry about having to think about it:

All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi

Wealth Odyssey: The Essential Road Map For Your Financial Journey Where Is It You Are Really Trying To Go With Money?

What a great little book this is. It is short, concise and to the point. I liked the examples the authors used which you could easily relate to. It has certainly made me reconsider my own behavior.

The fact that it is so short and well written makes it likely you will actually read it. I think it could be helpful to anybody with the slightest interest on why make certain economic choices rather than others. And why we keep doing them.

Don't be put off by the fact that it is a book about economics. The authors made a great job at making this book relevant to the average Joe (or Jane) and by the time you've finished reading it, you won't feel you read an economics books.

This book is about you, read it.