Name: The Behavior Gap
Rating: 4.2 (94 reviews)
Author: Carl Richards

What’s in it for me? Learn how to make smart financial decisions (and stop worrying about money so much).

We’re saturated with financial advice and information – so why do so many people keep losing money and winding up in dire straits? In his work as a financial planner, author Carl Richards saw the effects of this firsthand. Everywhere he looked, people were making lousy decisions and suffering as a consequence. This is what drove Richards to write The Behavior Gap. These blinks show you how tuning out all the noise and focusing on your own personal goals will help you invest wisely, secure your financial future and live a happier life.

In addition, you’ll learn

why you shouldn’t always follow The Economist’s advice;
why trying to predict the future could damage your finances; and
why you should talk to your kids about money.

The behavior gap arises whenever there’s a rift between what we should do and what we actually do.

Do you ever find yourself doing something that you shouldn’t, like having a third piece of cake even though you want to lose weight?

This is called the behavior gap: a rift between what we know we should do, and what we actually do.

This phenomenon is tied to our natural desire to avoid pain and seek pleasure, which leads us to act irrationally.

One effect is that we often adopt a herd mentality, where we behave exactly like those around us without pausing to make our own decisions. This is because we assume it’s safer to do what everyone else is doing.

This was seen in the 1990s dot-com boom. It seemed everyone was reaping huge profits on investments, so even ordinary people began borrowing money against their home equity, and ended up investing over $44 billion in stocks. Then when the NASDAQ shed half its value, people lost their investments and found themselves deeply in debt. This kind of reasoning can be found at the root of any market bubble.

These situations produce a behavior gap: Instead of acting rationally, people get excited and let emotions guide their choices. To close the gap, think beyond today’s trends and remember surprising past events: the dot-com crash, the housing bubble, the 2008 debt crisis.

All these incidents underscore the importance of investing carefully, without getting caught up in boom-and-bust cycles. Thinking about them will help you close the behavior gap by making the consequences of herd mentality more concrete.

Also, avoid overconfidence. In the 1990s, Long-Term Capital, a hedge fund run by Nobel Prize winners, learned this lesson. Blinded by its own pedigree, the company’s board of directors was positive the firm could never lose more than $35 million per day. But one day, to their horror, the firm lost $553 million. Eventually, the company had to be bailed out by the Federal Reserve.

We can’t predict the future; we can only control our own behavior.

Instead of hunting for the world’s best investment, make financial decisions based on personal goals.

Have you ever wondered, What’s the world’s best investment? If so, you’re asking the wrong question.

Here’s why: Planning for your future entails a delicate balance between living for today and saving for later.

Ignore most of the generic financial advice you hear in the media; instead, make your own financial decisions.

Most of us love giving advice. It makes us feel important and wise.

But that’s exactly why most advice is fundamentally useless.

Money can only buy so much happiness; beyond that, it’s merely a tool for pursuing personal goals.

Why do so many of us strive for financial security? We have good reasons: We just want to be happy and provide a good life for our loved ones.

Happiness is very important, but we should always try to remember that true happiness is more about expectations and desire than how much we earn.

Mainstream media propagates a herd mentality, which can distance you from your real financial goals.

We all want to be informed and knowledgeable about financial markets and the economy. But listening to mainstream media can actually lead you astray.

That’s because mainstream media often propagates a herd mentality: making us feel safer in numbers. So when we follow the media’s advice, we take comfort in knowing that we’re behaving the same way as everyone else.

Stay on track with your financial goals by preparing for surprises and making adjustments when necessary.

Do you know the difference between planning and formulating a plan?

There’s a distinction: A plan makes predictive assumptions about the future. But no matter how hard we try to predict the future, we’ll be wrong.

Rational investing requires you to be honest, to get rid of stagnating assets and only invest according to personal goals.

Emotions make us human, but there’s a high cost to allowing your feelings to shape your financial decisions. So how can you avoid letting emotions dictate your finances?

First of all, be honest with yourself: Great investments require just as much luck as skill. Sometimes you make smart decisions that lead to successful investments. Other times, you’re just lucky.

Take responsibility for your decisions, but remember: You’re never fully in control of outcomes.

Children are taught to admit when they’ve done something wrong. But do we adults follow our own advice?

If you’re not used to taking responsibility for your actions, it can be hard. But it’s essential to improving your finances.

Talking about money with friends and family can be uncomfortable, but it’s also important.

Many people feel that it’s still taboo to talk openly about money with friends and relatives. Since everyone has a different background and attitude toward it, money can sometimes feel like a dangerous topic. But if you’re committed to making sound financial decisions, it’s too important to skirt around.

So if we want to avoid misunderstandings, we need to consider our own biases and strive to find a common language.

When it comes to making financial choices, keep it simple and be boring.

Have you ever heard the phrase, “Simplicity is the ultimate form of sophistication?” It also applies to your finances.

Simple solutions can bring us closer to our goals, while complexity slows us down.

The Behavior Gap summary