The common impression among smart people is that they are also doing well in all areas in their lives. They are champions in their respective careers and they’re most likely will become millionaire someday. On the contrary, the latter perception is not generally true especially for some experts. For them even the brightest executives in the land may practice wrong money management from the start of his or her career.
In the book of Gary Belsky and Thomas Gilovich entitled “Why Smart People Make Big Money Mistakes,” the two authors pointed out beliefs and behaviors of brainy people that affect their personal finance. Few of the common traits that the psychology professor Gilovich and magazine writer Belsky cited are “decision paralysis,” “endowment effect,” “status quo bias,” “confirmation bias,” and “loss aversion.”
Status quo bias is connected to decision paralysis in a sense that when these people can’t do final decision quickly they resort to their usual preference. In effect they fail to make bold moves to make their status better like they rather remain in companies that give then low salary or they let their money sleep in the bank instead of trying to grow in different investments.
Meanwhile, confirmation bias relates to people tendency to prove what they think is right or initial impression. It is a mistake for the decision-making of people because they tend to consider contradictory options or ideas almost irrelevant. Confirmation bias is also related to “anchoring” or getting unimportant details and “overconfidence” in their acquired knowledge.
According to Investopedia, endowment effect is an example of behavioral finance and “a circumstance in which an individual values something which they already own more than something which they do not yet own.”
Like status quo and confirmation bias, the endowment effect stops smart people to acquire other assets because they perceive that what they have are fine. Though there are possessions that are good to keep, there are also that should be sell because they don’t bring value anymore. Investopedia added that the endowment effect is “an example of an emotional bias.”
Loss aversion is the strong probability that people based their decision according to losses that they may experience instead of focusing on what they possibly gain. Commonly, this kind of decision theory is applicable in investing like in the stock market.
Meantime, this book of Belsky and Gilovich also offer solutions to these behavioral finances and decision theories that based on Amos Tversky and Daniel Kahneman’s study. Two of those are to do long-term investing and ask experts’ opinions. Other money mistakes that also mentioned in the book are mental accounting, planning fallacy, and herd instinct.