Can’t help myself. Books are fun. I’m trying to keep the reviews short. Go to the library to get them, but if you are going to buy, feel free to go through my Amazon Affiliate in the sidebar.
This book was absolutely the coming out party for behavioral economics. Published in 1999, Why Smart People Make Big Money Mistakes is the merging of personal finance and psychology. Instead of talking about the book, I’m providing some examples from the book that made it so interesting. I rewrote them to shorten the length, but the point is still made.
The social contract
Bad service from a restaurant is usually due to a previous customer leaving a bad tip, leaving the server in a foul mood. This is a part of a social contract we all have. Make sure to tip even when service is bad, just note on the receipt service was sub par. Don’t contribute to this downward spiral.
Distorted perception
In three successive years, Luke, Leia, and Chewy all bought different stocks for $1000. Each held their stock for 1 year and sold it. During Luke’s year, the country experience 25% deflation – the average price of goods went down 25%. Luke sold his stock for $770, a loss of 23%. During Leia’s year, the country experienced 25% inflation. She sold her stock for $1,230, a gain of 23%. In Chewy’s year there was no inflation, and he sold his stock for $980, a loss of 2%. Who had the best return? A Princeton professor conducted a study to find who students thought had the best return. 60% thought Leia did. Very interesting, since that’s wrong. Luke was the only one to make money relative to inflation.
Odds are you don’t know what the odds are
John is 31, unmarried and lives alone in a small Iowa town. He’s shy, and has little interest in talking to people or being social. John exhibits the need for order and structure and has a passion for details. He loves reading. What is likely John’s job, a librarian or a salesmen. Certainly sounds like a librarian. But how often do we make judgments like this and completely ignore other facts that may not have been presented? For instance, while John sounds like a librarian, the mathematical odds make it more likely he is a salesmen. Why? Because (using the book’s statistics here) there are 15 million salesmen in the United States, and only 180,000 librarians. Making John 80 times more likely to be a salesmen.
My money is worth more than yours
Imagine you’re a huge fan of (the now retired) Michael Jordan. He’s due to retire at the end of the season and you’ve never gotten to see him play. Your boss hands you tickets to his final game saying he can’t make it because of another engagement. A few hours before the game, its announced Jordan will not be at the game, due to an injury. Do you still go even though he’s not there? Many won’t.
Now imagine you saved your money for 6 months for tickets to the game and the same announcement happened. The tickets cost you $400, do you still go? Many would. If you and your manager paid the same for the tickets, why would you only go if you had paid for them? Because those tickets represent a goal and the accomplishment of months of budgeting. At that point there was more meaning to the tickets because of the work they symbolize.
If you are into the behavioral side of personal finance this is an absolute must read. This was just 4 of a hundred such examples, with thought provoking arguments. I had to re-read a section 3 times and its still not quite clicking, which just means I’m not as smart as the authors. If these reworked excerpts are your type of thing, go get this book.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. |
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