Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons From the Life-Changing Science of Behavioral Economics

Our idea is slightly different. We’re suggesting that when you make important financial decisions, you should ask trusted friends or experts what they think of your decision-making process. In other words, don’t ask if they agree with your decision, ask if they think the way you went about reaching your decision was wise and thorough.

We argue that the well-documented tendency for human beings to be overconfident can best explain the high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth

The confirmation bias can affect almost any decision you make. Once you develop a feeling about a subject—no matter how unconscious that preference might be—it becomes hard to overcome your bias.

Lucky for you if you manage to find an above-average fund manager. If not, you would probably have been better off just investing in the stock market in general. Which, as it turns out, is exactly what we’re suggesting you do, through a kind of mutual fund that’s become hugely popular in recent years—index funds. Index funds (forgive us if you know this) are essentially mutual funds that mirror the benchmark stock averages in different categories.

So when you are evaluating investments such as mutual funds or annuities, don’t be swayed by one or two years of strong results. Even when you look at long-term performance, pay careful attention to year-by-year results.

Stated differently, people overvalue what they have (today’s salary) and fail to properly value what they could have (employee matches and the benefits of tax-deferred savings).

People place too much emphasis on their out-of-pocket expenses (what they have to pay now) and too little value on opportunity costs (what they miss by not taking an action).

The reality is that the more time you have to do a task—any task—the less pressure you feel to get with it, and the frequent result is you never get to it at all. Such delays, needless to say, can be costly.

The more choice, in other words, the harder the choice.

Weber’s law implies that the pain of two moderately bad experiences will typically exceed the pain of experiencing both at one time. If you owe the government money, then pay your state and federal taxes at the same time.