Every year more and more people graduate from post secondary institutions, the overall population should be very well informed about their finances. It seems they are less and there are many theories on the why? Perhaps money does not go as far, perhaps the companies where money is spent are brilliant or perhaps there are other reasons. In an book written a few years ago, but still very valid today, Why Smart People Make Big Money Mistakes, by Gary Belsky and Thomas Gilovich, Simon & Schuster, NY, 1999, offers ideas in the Behavioral Economics format. The authors have a few principles to consider and lessons to be learnt.

Every dollar spends the same – money comes from a variety of sources – salary, wages, gifts, lottery winnings, bonuses, tax refunds. Most of us treat money differently,  an example is a gift. If we receive money we were not expecting, we will likely spend it. The better attitude is to treat the gift money the same as your regular source of income. Perhaps the best solution is to park in an account for a week and then decide what to do with it. The time helps change your attitude towards the money and it will be  seen similar to salary or wage income.

Losses hurt you more than gains please you. One of the central points of the Prospect Theory is people are loss averse. People feel greater pain losing money than the pleasure of winning money. Feeling greater pain means people try to avoid risks or losing and the theory help explain the sell low, buy high rather than sell high, buy low.

Learning what holds people back, means there are counter measures to mitigate in order to come out ahead. Linking to dividend producing stocks, the income plus the potential capital gain is a tried and true measure to come ahead in the long run. More in tomorrow’s column.

There are more questions than answers, till the next time – to raising questions