Money mistakes

I skimmed through Why Smart People Make Big Money Mistakes & How To Correct Them, by Gary Belsky and Thomas Gilovich. It's an interesting book about behavioral economics, and how some common irrationalities that we all exhibit can affect our behavior with money. Some of the issues:

  • We tend to keep separate mental accounts for our money; don't let these mental accounts affect your spending patterns.

  • Losses affect us more than gains hurt us, so we get more reckless in trying to avoid losses.

  • Sunk costs do not matter.

  • We are affected by how issues are framed: reframe issues so that you see them both as gains and losses.

  • Don't ignore small numbers, such as mutual-fund fees.

  • We tend to anchor on irrelevant information, and we treat events that are likely to be the result of change as non-random; don't pay attention to such irrelevant information.

  • Don't be overconfident about your abilities if you have little training.

  • Avoid "confirmation bias", which is our tendency to treat information as though it confirms our decisions.

  • Don't follow the herd.

  • Avoid too much information. Information can cause us to act emotionally.

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