Lessons from "Why Smart People Make Big Money Mistakes"

1. Every dollar spends the same

Money is money and they all worth the same, no matter where it comes from, where it is kept, or how it is spent. Remember that bonus money is money and worth the same as your earned money.

2. Losses hurt you more than Gains please you

Most people are loss averse. The pain people experience from losing $100 is greater than the pleasure of gaining the same amount. This is why people behave inconsistently when taking risks.

What's tricky about Loss Aversion is that it can often lead us in the Opposite Direction. One person can act conservatively when protecting gains (by selling successful investments to guarantee profits) but recklessly when seeking to avoid losses (by holding on to losing investments in hope that they will bounce back and become profitable). It's a fact that individuals tend to Sell Winning Investments Too Quickly and Keep Losing Ones Too Long.

Mebane Faber has shown why stock prices bounce up & down more drastically during Falling markets than during Rising ones: If you're a stock trader who's lost a lot, the temptation to Gamble Big in the Hopes of recouping money is very powerful.

3. Money that is spent is money that does not matter

Past mistakes should not lead you to make future ones. The past is the past and what matters is what is likely to happen from now on. So, a person who turns down an offer for a house because the bid is lower than the original purchase price may be following one blunder (paying too much in first place) with another (not getting out while the the getting is good).

4. It’s all in how you look at it

The way you frame decisions (particularly the way you code losses and gains) profoundly influences the choices you make. The same set of options might lead to a different decision depending on whether you view your choice as one of rejection or one of selection, or whether you view it as protecting a gain or avoiding a loss. That is why it is wise to view a decisions from all sides.

5. Too much choice makes choosing tough

Although we have been conditioned to view unlimited options as something to be desired, in reality a flood of options can leave us anxious and unable to decide. That is why it is often a good idea to limit your own choices. One smart way to do this is to find a trusted screener whose judgment you like and whose honesty you can rely upon to select down or even make your choice for you.

6. All numbers count, even if you do not like to count them

Small numbers can add up to big costs. Do not forget to count them no matter how small it seems. Look at your brokage commissions, is it at par with the market?

7. You pay too much attention to things that matter too little

People have tendency to weight certain facts, figures, and events too heavily, to give too much importance to them. People also tend to place to much emphasis on especially memorable or unusual events, not realizing that memory is much unreliable than they think.

8. Your confidence is ofter misplaced

People believe that with a little knowledge, he can pick investments with better-than-average success. In reality even the most sophisticated investor have little reason that she can pick stocks better than average man on the street.

9. It is hard to prove yourself wrong

People have a subconscious inclination to confirm what they already know or what they want to believe. It is important to temper your own self-confidence by sharing financial decisions with others.

10. The trend is not always your friend

The challenge in taking counsel from others is not to abandon completely your own instincts, common sense, and reason. Following the herd can lead you to overreaction and missed opportunities. Treat trends and fads sceptically and cautiously.

11. You can know too much

Too much information can be destructive, because people with too much info can be easily swept up in information cascades. The less frequently you check on your investments, the less likely you will be to react emotionally to the natural ups and downs of the market.

12. Your emotions affect your decisions in more ways than you imagine

Our primitive instincts affect our more reasoned thought processes. As a result, we often make spending and investing decisions that do not serve our true long term goal. Put some rules for you to spend or invest.

Source: https://saladnavy.wordpress.com/2011/10/27/why-smart-people-make-big-money-mistakes/

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