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The Behavior Gap

Simple Ways to Stop Doing Dumb Things with Money

By Carl Richards
18-minute read
The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money by Carl Richards

These blinks will help you to make better decisions about money. By defining the behavior gap – the rift between what we should do and what we actually do – and explaining how to close it, Richards offers guidelines for making smart financial decisions for life.

  • Anyone who wants to spend and invest money wisely
  • Anyone interested in self-help and self-improvement
  • Anyone who doesn’t think money is the be-all and end-all of happiness

Certified financial planner Carl Richards is director of investor education for BAM ALLIANCE, a group of more than 130 independent wealth management advisors. He has contributed to the New York Times and been featured on Marketplace Money, Oprah.com and Forbes.com.

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The Behavior Gap

Simple Ways to Stop Doing Dumb Things with Money

By Carl Richards
  • Read in 18 minutes
  • Contains 11 key ideas
The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money by Carl Richards
Synopsis

These blinks will help you to make better decisions about money. By defining the behavior gap – the rift between what we should do and what we actually do – and explaining how to close it, Richards offers guidelines for making smart financial decisions for life.

Key idea 1 of 11

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.

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