◆ Gems
Ep 57How Money Plays Tricks on Your Mind
1:26

Money, marriage & family · 1:26

You realize you're going to be paying $3,000 for a button?

Do you realize you're going to be paying $3,000 for a button? That's an expensive button.

Rabbi Naftali Horowitz

Ep 57Aug 30, 2023

How Money Plays Tricks on Your Mind

with Rabbi Naftali Horowitz

There's never been a death certificate issued where cause of death was regret.

Rabbi Naftali Horowitz

More moments · 6

1:26
Why is affinity fraud so prevalent? It's called representation bias.
0:59
I meet people every day with $600,000 HELOC balances and a savings account
1:28
Would you risk $500,000 that's already in your checking account?
1:17
You own 10,000 shares, sell half, and now you're hoping it crashes
1:13
His stock is down 65% and he won't sell. Here's what I tell him.
1:32
Same suit, same price: one flew off the shelf, the other didn't budge

Try this · top 3

Quotes

“99% of the time, when what you see before you deviates that greatly from the base rate fact, it's probably not going to work out as advertised.”

Rabbi Naftali Horowitz

“$25 is $25.”

Rabbi Naftali Horowitz

“Do you realize you're going to be paying $3,000 for a button? That's an expensive button.”

Rabbi Naftali Horowitz

“You so abhor regret that you would rather lose money than feel regret.”

Rabbi Naftali Horowitz

“Regret never hurts as much as we think it will.”

Rabbi Naftali Horowitz

“Try to make financial decisions based on fact and not feeling.”

Rabbi Naftali Horowitz

Takeaways

  1. 1 In 2008, smart investors, including CFOs, begged to sell everything. That led him to behavioral finance (Ariely, Kahneman).
  2. 2 Most people answer the bat-and-ball question wrong (the ball costs 5 cents). We go with our gut even when a bit of thought would get it right.
  3. 3 'What you see is all there is': we judge by what's in front of us and ignore the base rate (there are far more salespeople than librarians).
  4. 4 Markdowns sell the same item that markups can't. We don't know what things are worth, so we look for cues.
  5. 5 Affinity fraud works through representation bias: someone seems honest, so we skip the homework.
  6. 6 Mental accounting: we treat money differently by its 'bucket' - lost ticket vs lost cash, eggs vs a steak dinner, the IRA vs the brokerage account.
  7. 7 That same bias explains why IRAs work: people label that money long-term and leave it alone.
  8. 8 Credit cards remove the pain of paying, so we spend more.
  9. 9 Windfalls feel like 'funny money,' so people gamble them (the game-show example).
  10. 10 Regret aversion keeps people out of good investments and stuck in bad ones. It feeds herd behavior and sitting on the sidelines.
  11. 11 Anchoring: random numbers shift our estimates (Canada, redwoods). Analysts and investors stay anchored to recent trends and old rates.

Full episode

Watch on YouTube