Book study: Why smart people make big money mistakes

Here is the medium article about the book.

Here are some notes I copied from the above blog

Mental accounting

Study by Epler: rebate (people don’t spend) vs bonus (easy to spend)

Bigger bonus = harder to spend

Credit cards — makes us spend $ we otherwise won’t, and often spend more.
Getting around:

Ditch credit card
Every dollar is the same
Wait before spending the bonus (weeks or months)
All income is earned income


Prospect theory

When decision is to make a preference, people look at the positive qualities
Conversely, when decision is to choose worse option, people look at the negative qualities
In finance:

We assign value to gains or losses in absolute terms and not as a % of net worth. Losing $500 for someone with $1,000 vs someone worth $100,000. Remember, every dollar is the same.
We feel more strongly about losses than gains = loss aversion.
Disposition effect — Sell winners early, hold losers too long.

Sunk-cost fallacy

Drive in snow to attend a game for which we bought the ticket even if it means risking life
Don’t want to appear wasteful