Learn / Part 1 · How Money Works
The Mind Behind the Money
Why do smart people make poor money decisions?
In brief
Money decisions are made by human minds that use shortcuts. Knowing the common biases (overconfidence, loss aversion, present bias, herd behaviour) gives you a chance to design around them.
Key ideas
Present bias
We overweight today and underweight the future, which makes saving feel harder than it is.
Make an insight card →Loss aversion
Losses hurt roughly twice as much as equal gains please, which pushes people to sell after falls.
Make an insight card →Systems beat willpower
Automatic saving, cooling-off periods and written rules do better than trying harder.
Make an insight card →Try it
Losses and recovery
Percentages are not symmetrical. After a fall, the gain needed to get back is larger than the fall, which is why avoiding big losses matters more than chasing big gains.
Open the full page: formula, variables, worked example and cautions →
Red flag
Pressure to decide today, “last chance”, or because “everyone is doing it”.
Ask before you sign
- What if I wait a week?
- What would I decide if I were advising a friend?
Do this week
Set up an automatic transfer to savings on payday.
Try it · 10–45 minutes
Write down a rule for how you will react if your investments fall 20%.
Connected ideas
Where else this shows up
Pause and reflect
Private to this device. Nothing is sent anywhere.
Words worth knowing
- Behavioural bias
- A predictable mental shortcut that nudges us away from good decisions, such as overconfidence or loss aversion.
Companion notes written for this website, based on the topics of Chapter 5. They explain ideas and do not reproduce the book. General information, not personal advice.