9 Psychological Reasons Why Smart People Do Dumb Things With Money Advertisement
 As human beings, our brains are booby-trapped with psychological barriers that stand between making smart financial decisions and making dumb ones. The good news is that once you realize your own mental weaknesses, it's not impossible to overcome them. You're about to buy an engagement ring so you do some research on prices. Most people say three months' salary is the general budget, so you freak out and request a credit line increase.  What's really going on: Anchoring. Anchoring happens when we rely too heavily on the first piece of information offered when making decisions. After encountering the "three month" rule, you find it hard to make a logical decision based your own financial reality or your relationship. You may not have three months' worth of salary to splurge on a diamond, but you decide to spend within that range because you are anchored to that idea.
You're 27 years old, in excellent health and just got promoted. You're so high on life that you can't fathom a time when you'll no longer be young, fit, and financially stable.  What's really happening: Myopia. Because you are unable to picture yourself in old age, bad health, or cash-strapped, you're less likely to save for unexpected events or your retirement. Myopia can be blamed for many depleted retirement savings account in the U.S. "Seduced by temporal myopia in their younger years, many people get around to saving seriously for their retirement far too late in their career, in their forties and fifties in many cases, which greatly reduces the amount of money they will have available for their retirement," says Shlomo Benartzi, a behavioral finance economist and author of "Save More Tomorrow." If you're lacking motivation, try this handy experiment: Use Merrill Edge's Face Retirement generator, which will take a photo of you as you are today and generate an image of what you'll look like in retirement. Benartzi's own research has shown that this kind of reminder can actually give people the kick in the butt they need to start saving for retirement.
You're watching the market closely and see that a certain stock has been tanking over the last few months. You give it another month, watch it drop again and decide to sell it off before history repeats itself.  What's really going on: Gambler's fallacy. When investors rely on past events to predict the future, they're shooting themselves in the foot. If a stock is flying or floundering for a year, that doesn't mean it will continue to do so in the next year, or even few months to come. The same thing happens when you buy a lotto ticket because your buddy next door just won $10,000 in a drawing. Just because he won doesn't change the odds of you winning at all. Keep your decision-making grounded in the real facts. Analyze your investments before making any sudden moves or following trends.
See the rest of the story at Business Insider | 
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