Why Smart People Make Big Money Mistakes

Gary Belsky and Thomas Gilovich have revised and updated their excellent book, Why Smart People Make Big Money Mistakes. Like its predecessor, it's a great introduction to the field of behavioral finance. It's both highly readable and entertaining. The book is filled with fresh insights, and each chapter contains practical advice on how to avoid the serious errors that most of us make simply because we're human. I view it as a must read for not only investors, but also those interested in human behavior.

When Belsky and Gilovich first published the book in 1999, their book had an enormous impact. It was extremely well written and provided fascinating insights into the field of behavioral finance. The authors explained why even the smartest people make foolish mistakes. I'm certain that readers experienced what I did: see themselves in the examples and stories provided.

Among the many mistakes the book covers are playing with the house's money, mental accounting (treating the same situation in different ways), confusing something familiar with something safe, believing in hot hands, herding, the endowment effect, loss aversion and (of course) overconfidence.

The book triggered a desire to learn everything I could about the field. Eventually, I wrote my own book on investor behavior, Rational Investing In Irrational Times. The book covered 52 investment mistakes. Among the four book projects I'm currently working on is an updated and expanded version of that book -- it now covers 76 such errors. I hope to have it published next year.

For those interested in this fascinating field, I would also recommend Jason Zweig's Your Money and Your Brain, Daniel Ariely's Predictably Irrational and Hersh Shefrin's Beyond Greed and Fear.