20 flaws, biases, and causes of bad behavior when people deal with money.

Question 1

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Answer 1

1. Earned success and deserved failure fallacy: A tendency to underestimate the role of luck and risk, and a failure to recognize that luck and risk are different sides of the same coin.

Question 2

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Answer 2

2. Cost avoidance syndrome: A failure to identify the true costs of a situation, with too much emphasis on financial costs while ignoring the emotional price that must be paid to win a reward.

Question 3

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Answer 3

3. Rich man in the car paradox.

Question 4

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Answer 4

4. A tendency to adjust to current circumstances in a way that makes forecasting your future desires and actions difficult, resulting in the inability to capture long-term compounding rewards that come from current decisions.

Question 5

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Answer 5

5. Anchored-to-your-own-history bias: Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works.

Question 6

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Answer 6

6. Historians are Prophets fallacy: Not seeing the irony that history is the study of surprises and changes while using it as a guide to the future. An over-reliance on past data as a signal to future conditions in a field where innovation and change is the lifeblood of progress.

Question 7

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Answer 7

7. The seduction of pessimism in a world where optimism is the most reasonable stance.

Question 8

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Answer 8

8. Underappreciating the power of compounding, driven by the tendency to intuitively think about exponential growth in linear terms.

Question 9

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Answer 9

9. Attachment to social proof in a field that demands contrarian thinking to achieve above-average results.

Question 10

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Answer 10

10. An appeal to academia in a field that is governed not by clean rules but loose and unpredictable trends.

Question 11

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Answer 11

11. The social utility of money coming at the direct expense of growing money; wealth is what you don’t see.

Question 12

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Answer 12

12. A tendency toward action in a field where the first rule of compounding is to never interrupt it unnecessarily.

Question 13

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Answer 13

13. Underestimating the need for room for error, not just financially but mentally and physically.

Question 14

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Answer 14

14. A tendency to be influenced by the actions of other people who are playing a different financial game than you are.

Question 15

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Answer 15

15. An attachment to financial entertainment due to the fact that money is emotional, and emotions are revved up by argument, extreme views, flashing lights, and threats to your wellbeing.

Question 16

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Answer 16

16. Optimism bias in risk-taking, or “Russian Roulette should statistically work” syndrome: An over attachment to favorable odds when the downside is unacceptable in any circumstance.

Question 17

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Answer 17

17. A preference for skills in a field where skills don’t matter if they aren’t matched with the right behavior.

Question 18

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Answer 18

18. Denial of inconsistencies between how you think the world should work and how the world actually works, driven by a desire to form a clean narrative of cause and effect despite the inherent complexities of everything involving money.

Question 19

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Answer 19

19. Political beliefs driving financial decisions, influenced by economics being a misbehaved cousin of politics.

Question 20

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Answer 20

20. The three-month bubble: Extrapolating the recent past into the near future, and then overestimating the extent to which whatever you anticipate will happen in the near future will impact your future.