Smart people can make some pretty spectacular money mistakes.
In fact, a whole field of economics is devoted to exploring how we make financial decisions — including the bad ones. Behavioral economics tries to pinpoint where our brains and emotions lead us wrong, as well as what we can do about it.
Certified financial planner Jill Schlesinger has witnessed some major money miscalculations.
One client who repeatedly refused to buy disability insurance later developed multiple sclerosis. A doctor she knew put off writing a will and left behind a six-figure tax bill. A technology company engineer balked at her suggestion to sell some of his stock options, only to watch their value and his retirement plans evaporate when the market plunged.
Schlesinger, a CBS News business analyst and author of “The Dumb Things Smart People Do With Their Money, ” admits to financial missteps as well, including waiting for “just the right moment” to invest and missing a big jump in the stock market.
“We’re emotional animals, not just rational ones,” Schlesinger says. “So even otherwise intelligent people are stymied by their emotions — usually fear and greed — and their cognitive biases.”
Here are three ways to prevent costly but common financial errors:
Most of us don’t like to dwell on what could go wrong, Schlesinger notes, and many of us believe we’re better at predicting the future than we actually are. Overconfidence, excessive optimism and the conviction that the recent past will continue into the future mean many of us don’t adequately protect ourselves.
The client who wouldn’t buy disability insurance, for example, thought he wouldn’t need it because he was healthy. The stock option guy didn’t want to sell a winning investment, not understanding how vulnerable he was to a downturn. The doctor just didn’t want to think about dying.
The antidote to this kind of thinking is to stop trying to calculate the odds of something going wrong. Focus instead on how much you or your loved ones have to lose if the worst happens. If you can’t easily absorb that loss, then buy the insurance, diversify your investments and write your will.
3 tips can keep smart people like you from making costly money mistakes
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