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Why Smart People Make Bad Financial Decisions

Photo of author, Will Carter, JD.
Will Carter, JD
Senior Advisor

The most consistent way that McKinley Carter helps its clients is simply by helping them avoid making mistakes with their money.

Some mistakes are caused by ignorance. Others by predictable, but sloppy, thinking.

Mistakes caused by ignorance are relatively easy for our advisors to help people avoid. Our expertise in financial matters and our ability to teach clients what they can do to take better care of their financial situation generally is enough.

But many mistakes are not caused by lack of education or intelligence. Rather, they are caused by what the article below calls “dysrationalia” – the tendency of people of all intelligence levels, especially the smartest, to make foolish decisions due to mental shortcuts and/or non-rigorous thinking about probability.

This is harder to manage, precisely because smart people don’t tend to think of themselves as capable of making what in hindsight might seem like foolish decisions. But we all do to some extent. One of the first steps to avoiding making such decisions is having the humility to recognize that natural tendency.

The article below contains several test questions that can help you assess the extent to which you have learned to manage the tendency to apply “dysrational” thinking. If you’re like me, you will find it a humbling, but informative, experience.

https://www.scientificamerican.com/article/rational-and-irrational-thought-the-thinking-that-iq-tests-miss/

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