Why do people make stupid money decisions?
Reader question:
Presh, random question for you: why do people make stupid money decisions? Any thoughts would be appreciated.
My answer:
This is an interesting question. The other day I saw someone pay more for food because he ordered ala carte instead of getting the combo. I certainly scratched my head after that one.
I was tempted to do some research on the topic, but then I thought of something. It’s too easy to point the finger at “stupid people.” You see, when we worry about what others are doing, we tend to overlook our own mistakes.
Each and every one of us makes stupid decisions, and probably regularly. I can see examples in my own life. I used to eat junk food regularly. And there was a time I didn’t understand the value of money.
What’s changed? Education is part of the solution. I know more now and can make informed decisions. But in some cases, education is not enough. For instance, obesity and bad debt are largely preventable, but these problems are getting worse.
That’s why focusing on education can be misguided. There is a passage in Fooled by Randomness that expresses the thought nicely:
One of the most irritating conversations I’ve had is with people who lecture me on how I should behave. Most of us know pretty much how we should behave. It is the execution that is the problem, not the absence of knowledge.
If education is not the answer, then what is? The passage continues and gives this thought:
I am tired of the moralizing slow-thinkers who pound me with platitudes like I should floss daily, eat my regular apple, and visit the gym outside of the New Year’s resolution. In the markets the recommendation would be to ignore the noise component in the performance. We need tricks to get us there but before that we need to accept the fact that we are mere animals in need of lower forms of tricks, not lectures.
That last sentence is a bit harsh. But perhaps the truth hurts?
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If you’d like to hear my thoughts on a money or game theory question, please feel free to email me at presh@mindyourdecisions.com. I will publish the best questions on this website. I may edit the question to make it more general. Please understand I cannot answer all emails due to time constraints.
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7 Responses to “Why do people make stupid money decisions?”
I agree that knowledge is not the problem. The problem is lack of desire to execute stemming from selfishness; we know what we should do, but we end up doing what we want to do.
Our selfish society has not made it harder to know what to do, it has made it easier and easier to ignore that nagging feeling that we shouldn’t be indulging our desires to the degree we are. We place as much importance in seeming to be addressing the problem (self-help books) as we do in actually executing the knowledge.
The tricks mentioned above simply help us to set aside our selfish nature enough to execute.
By Norm on Oct 30, 2008
I am a big fan of behavioral economics and recently came across Dan Ariely’s book, “Predictably Irrational”. I think the answers lie in the fact that game theory only explains one-half of the equation for human behavior – the rational side. The only side is full of irrational behavior, which has been explored by behavioral economists like Ariely and company. If I remember correctly, the book actually talks about just this topic. Unfortunately, I can’t remember the theory behind it.
By Ceres on Oct 30, 2008
I’ve made my share of ’stupid’ money (and other) decisions in the past. I do my best to learn from them and move on (hopefully not to repeat the same mistake!). Why do people make ’stupid’ money decisions? I’m sure the reasons are many but what comes to mind are lazy (lack of or little research), rebel (I want it my way – so there mentality), the crowd mentality (everyone else is doing it that way), and I know better than anyone what is right for me. Also I think we need to experience the other side of the coin (pun intended) sometimes just so we can have that experience.
P.S. – I like your image above for this post!
By Mark W. on Oct 30, 2008
I agree that we need tricks. With that said, can anyone offer some tricks they have been able to successfully use on themselves to motivate themselves, stay on course, et cetera?
By Pat on Oct 30, 2008
Norm:
We do tend to place responsibility on others instead of ourselves–part of the reason I try to avoid worrying about what others are doing
Ceres:
Thanks for the book reference. It looks interesting. Behavioral economics fascinates me because it seeks the causes of why we are systematically biased. This is very useful because companies will try to exploit these things. We have to guard ourselves.
Mark W.:
Good summary of the major money mistakes. Laziness and conformity are strong forces. Often people will make the wrong decision just so they don’t stand out! Something is good about having carefully picked eccentricities and individualism.
Pat:
This sounds like a good question to develop in detail in another post! I’ll see what I can gather.
By Presh Talwalkar on Oct 30, 2008
A great book that explores how human (and animal) behaviors are irrational (temporally inconsistent) is Ainslee’s Breakdown of Will. Apparently, while rational behavior would be explained by exponential discounting — and thus keep decisions consistent over time — experimentation has shown behaviors follow a hyperbolic discount. This means that once a reward approaches, its immediate value overshadows what would be the higher payoff behavior by being more prudent. Ainslee shows how this inconsistency can explain a wide variety of irrational behavior, including addiction.
By Mike on Oct 31, 2008
Mike:
Thanks for the book recommendation. Yes, hyperbolic discounting seems like a great explanation.
It might explain why weddings cost so much. My friend observed that many women have been dreaming of their wedding day but don’t plan much farther ahead. So their spending preference would likely exhibit hyperbolic discounting.
By Presh Talwalkar on Nov 4, 2008