7 Money Mistakes That Prevent Smart People Getting Rich

 I recently read a study in MIT Technology Review that looked into the relationship between intelligence and success. The researchers tried to understand the link between being smart and being rich. They concluded: “The most successful people are not the most talented, just the luckiest.”

I think this is true. There’s no correlation between knowledge and wealth. As Warren Buffett once said: “If past history was all that is needed to play the game of money, the richest people would be librarians.”

The reality is that smart people have all the tools and ideas they need to get rich. However, they often don’t use them well and make the same mistakes repeatedly.

Here are some of those mistakes. Do any of these sound familiar to you? If you can stop making them, wealth is likely to follow.

1. Over-optimizing financial decisions

In my own experience, I’ve seen highly intelligent people often fall into the trap of over-optimization. They spend countless hours researching and analyzing to make what they believe is the “perfect” financial decision—whether it’s about investing in stocks, buying insurance, or choosing a mortgage plan.

The irony is that while seeking the optimal choice, they often miss out on good opportunities that were right in front of them. The lesson? Keep it simple.

Money is a straightforward concept. If you borrow money, you have to pay it back with interest, which means you end up paying more than you borrowed. You probably won’t always be able to make money by working, as we all get sick or injured, and most of us can’t work until old age. So, think about your future earnings.

Keep your spending under control. If you consistently spend less than you earn, you build wealth. It’s better to be an owner than a lender. If you get interest on your savings account, you’re lending your money, and the upside is fixed. If you own stocks, property, or businesses, the upside is higher.

If it doesn’t make dollars, it doesn’t make sense. Ignore opportunities you don’t understand. If you keep this in mind, you’ll save yourself a lot of financial trouble in the future.

2. Following the herd

The herd mentality, also known as the “madness of crowds,” is a powerful psychological phenomenon. It’s when people copy the actions and decisions of others, often ignoring their own analysis and beliefs.

In investing, this can lead to speculative bubbles where you can lose a lot of money. But following the herd isn’t just about investing. There’s a lot of herd behavior in society, too. Think of buying cars, clothes, accessories, or going on vacations. We tend to want what others want.

So, try to step away from the herd. Pave your own path. Enjoy a simple life.

3. Focusing too much on the past

Hindsight bias is when you convince yourself that you predicted an event accurately before it happened. This can make you think you can predict other future events too.

Many investors remember their successes but forget failures, which distorts their view of how good they are at investing.

Some say, “If it worked in the past, it will work again.” Maybe, but it’s not guaranteed. The same goes for our careers. We can’t always expect to make money with our current skills, considering all the jobs that no longer exist.

Relying on hindsight bias can make you take too many risks based on patterns that might not hold true in the future.

4. Trying too hard

Regret aversion is when you avoid decisions that might make you feel regret, even if those decisions could make you money.

Investors often hold onto losing investments for too long or avoid buying undervalued assets because of a few reasons:

They're too scared of making the wrong investment choice;

On the other hand, they might also fear missing out on big profits from hyped stocks;

Or they just don’t want to properly assess their positions.

This bias can make you act irrationally, like trying too hard to make money. This can lead to taking too many risks or being too scared to take any risks at all.

To beat regret aversion, stay balanced. Finding a middle ground is important.

5. Treating money differently based on its source

Mental accounting means treating money differently depending on where it comes from or what it's meant for. For instance, some folks might spend a tax refund on luxuries instead of saving or paying off debt because they see it as "extra" money. The same goes for a holiday bonus – many of us would rather spend it than invest it. But money is money, and we should treat it all the same, no matter how we got it.

6. Focusing on losses

Loss aversion is when we'd rather avoid losses than make equivalent gains. In investing, this can mean holding onto losing investments for too long, hoping they'll bounce back, instead of cutting losses and using our resources more wisely.

This bias comes from the emotional pain of financial losses. Because losses hurt more than gains feel good, we tend to dwell on them. As stock market expert Peter Lynch said, successful investors accept losses as part of the game and keep going.

This was my big mistake when I started investing. I had a bad experience with my first stock purchase, so I got too fixated on the fear of losing money.

It's a common misconception that stocks and Wall Street are only for the wealthy and that regular folks get cheated. While there might be some truth to that, you can't ignore that the stock market is the best way to build wealth. Focus on that instead.

7. Confirmation bias

Confirmation bias is when you look for, interpret, and remember information that supports your existing beliefs while ignoring or discounting information that contradicts them.

This bias can greatly affect financial decision-making, leading you to make choices based on incomplete or skewed information. Sometimes, you get an idea to invest in something and start searching for evidence to support it. It’s easy to cherry-pick positive arguments for any investment. But with your money, you need to also play the devil’s advocate.

Be skeptical of your own ideas. This is probably one of the hardest things to do because we tend to be overly optimistic when we think we have a good idea. But we can’t let that optimism interfere with making sound financial decisions.

By understanding and addressing these psychological biases, everyone can improve their financial decision-making. That’s how you achieve long-term wealth and success.

By : Mustafa Gai @MrGai24, Freelance Writer and Translator

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