Pimp Your Finances

Most money books just tell you what you should be doing – which most of us already know, but ignore anyway.

“Why Smart People Make Big Money Mistakes – and How to Correct Them” is unique in that it examines why we don’t do the things we know we should be doing.  It seeks to improve your finances by helping you examine - and more importantly - change the way you make decisions.

I’m a big believer that if you want to change anything in your life, you have to change the way you think.  This is the perfect book for that.

The authors tackle topics such as:

• Mental accounting – the tendency to value certain dollars more than others depending on where they came from or where they’re going
• Loss aversion – the fact that a loss tends to feel twice as bad as an equal gain would feel good
• Sunk cost fallacy – the habit of considering past expenses with regards to future decisions
• Indecision – why we hesitate to make decisions, and what it can cost us
• Number illiteracy
• Bigness bias – the tendency to overlook small costs or bury them in larger expenses
• Anchors – latching on to a piece of information that has nothing to do with question at hand

They examine each of these tendencies, showing how they help us, but more importantly how they hurt our finances.  They do so in a way that is witty and entertaining.  They frequently question the reader to prove how they are prone to the traps mentioned above.  Even when you’re aware that the authors are trying to trick you, you can’t help but fall for it.

By being aware of the tendencies listed above, we can avoid making mistakes, and genuinely change our life and our finances.  They don’t just treat the symptoms of poor finances – they treat the illness at its core.  It’s already had an impact on me, in that I’ve decided to start an IRA before my debt is paid off.  Thanks to the book, I realized that I was valuing today’s dollars more than I would a greater number of dollars in retirement.

As soon as I finished it, I read  it again.  It’s funny and entertaining, and the authors keep things interesting by using a mix of examples, psychology, and statistics to prove their points.  The emphasis is to change the way you think, but the book is also full of sound financial advice.

This book is a must read for anyone, regardless of their age or financial savvy.

Executive summary:

Title: Why Smart People Make Big Money Mistakes – and How to Correct Them

Authors: Gary Belsky and Thomas Gilovich

Target Audience: Everyone

Pages: 220

Topics/Chapters:

0. Introduction to the new science of behaviorial economics.

1. Not all dollars are created equal – how mental accounting can help you or cost you money.

2. When six of one isn’t half a dozen of the other – how “loss aversion” and the “sunk cost fallacy” lead you to throw good money after bad.

3. The Devil That You Know – How the “status quo bias” and the “endowment effect” make financial choices difficult.

4. Number Numbess – “Money illsion”, “bigness bias”, and other ways that ignorance about math and probabilities can hurt you.

5. Anchors Aweigh – Why “anchoring” and “confirmation bias” lead you to make important money decisions based on unimportant infromation.

6. The Ego Trap – “Overconfience” and the price of thinking that you know more than you do.

7. I herd it Through the Grapvine – “Information cascades” and the danger of relying too much on the financial moves of others.

8. Conclusion – Now What? - principles to ponder and steps to take

9. Postscript -Psychic income

Should I Read it?  Read it twice

More book reviews