The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money

Chapter 14. Markets May Be Rational, but We Aren't

Investing Is Simple—And Yet It Sure Isn't Easy

Sensible money management is pretty straightforward: We need to save regularly, control risk, buy a few funds, hold down costs, and keep half an eye on taxes. As I hope I've made clear in the preceding chapters, investing can be remarkably simple.

And yet it sure isn't easy. We make all kinds of behavioral mistakes, including saving too little, growing overconfident as markets rise, and losing faith when share prices tumble. That doesn't mean we all make the same mental mistakes and share the same behavioral quirks. But some of these quirks are pretty widespread—and they hurt many folks' investment results.

All this represents a partial repudiation of classical economics, which assumes our behavior is rational. Rational? Think about that next time you fail to go to the gym, eat the chocolate you swore you wouldn't touch, spend too much at the mall, and once again rack up shocking credit card bills.

Struggling to Save

Indeed, our behavioral struggles start with our lack of self-control, which means we find it tough to delay gratification and we end up saving far too little. As I suggested in Chapter Four, this may have evolutionary roots. Our hunter-gatherer ancestors didn't give much thought to how they would pay for retirement. Instead, they were focused on surviving, which meant consuming whenever they could. Maybe it is no great surprise that delaying gratification doesn't come easily ...