Situations / Money and investing
Money and investing
Spending, saving, pricing and investing.
Traps you might be in
- No. 0037 Anchoring BiasThe seller asks $18,000, and you spend the evening deciding how far below that number you can go.
- No. 0074 Bandwagon EffectYou join the long line at a food truck before looking at its menu.
- No. 0326 Endowment EffectYou list your old bike for $300, then realize you wouldn’t pay that much for it yourself.
- No. 0335 Escalation of CommitmentThe pilot misses its target, and you open next quarter’s budget to find more money for the plan you pitched.
- No. 0413 Gambler’s FallacyAfter five heads in a row, you put more money on tails.
- No. 0450 Halo EffectThe candidate gives a dazzling presentation, and you give their untested management skills a higher score.
- No. 0476 Hot Hand FallacyAfter three winning roulette bets, you double your next stake because tonight you feel unstoppable.
- No. 0483 Illusion of ControlYou choose the lottery numbers yourself, then feel less willing to swap your ticket for one the machine picked.
- No. 0494 Impact BiasYou check an unanswered job application again, certain that getting the offer would make the whole year feel different.
- No. 0587 Loss AversionYou find $20 in an old coat, then lose $20 on the train and spend the evening thinking about the loss.
- No. 0697 Optimism BiasYou read that most applicants get rejected, then start planning what to wear on your first day.
- No. 0703 Outcome BiasYou drive home exhausted, arrive without a scratch, and decide you were fine to drive.
- No. 0763 Present BiasYour workout starts in ten minutes, but you sit down for one more episode.
- No. 0775 Probability NeglectYou cancel a flight after picturing a crash, without checking how likely a crash is.
- No. 0846 Representativeness HeuristicA stranger talks enthusiastically about chess, and you decide he’s a mathematician before learning what he does for a living.
- No. 0887 Scope InsensitivityThe fundraiser changes from saving 200 birds to saving 20,000, and you still reach for the same $20.
- No. 0979 Status Quo BiasYou renew the same phone plan again, with a cheaper offer still open in the next tab.
- No. 1003 Sunk Cost FallacyYou keep pouring time into something because of everything you’ve already put in.
- No. 1008 Survivorship BiasYou scroll through traders’ success stories and start planning how to quit your job.
Tools to try
- No. 0080 BATNAThe dealer holds firm on price, and you have another car lined up across town.
- No. 0147 Circle of CompetenceYou understand the rental property’s repairs, but the agent’s spreadsheet leaves you guessing about the investment.
- No. 0167 Commitment DeviceYou ask a friend to hold your game console until Friday, before the urge to play kicks in.
- No. 0239 Decision JournalSix months after a disappointing hire, you open your original notes and discover how certain you were that it would work.
- No. 0590 Margin of SafetyYour flight lands at noon; you book the three o’clock train and leave the one o’clock ticket alone.
- No. 0696 Optimal StoppingYou find a rental you can afford, but keep refreshing the listings while its application deadline gets closer.
- No. 0878 SatisficingYou find an apartment within your budget and near work, then close the other rental tabs.
Patterns at play
- No. 0018 Adverse SelectionYou turn down another low offer for your well-maintained car because buyers price it like one hiding an expensive fault.
- No. 0180 Compounding EffectYour savings earn $500 the first year, then $525 the next, even though you haven’t added a dollar.
- No. 0245 Default EffectYou silence your new phone after a week of alerts from settings you never chose.
- No. 0264 Diminishing ReturnsYou hire another pair of hands, but the same cramped kitchen sends out only a few more meals.
- No. 0459 Hedonic AdaptationA month after buying the car you couldn’t stop thinking about, you drive it without noticing it.
- No. 0512 Information CascadeYou approve the supplier despite a bad test result, assuming the three people who approved it before you know something you don’t.
- No. 0665 Network EffectsYou download a new messaging app, then leave it unopened because everyone you need to reach is still somewhere else.
- No. 0721 Pareto PrincipleYour bank statement has forty small purchases, but rent and two bills swallow most of the money.
- No. 0769 Principal-Agent ProblemYour adviser recommends a fund, and you discover it pays them more than the cheaper option would.
Concepts to know
- No. 0056 Asymmetric InformationYou test-drive a used car for twenty minutes; the seller has driven it for five years.
- No. 0343 Expected ValueThe repair shop offers a $180 protection plan, and you weigh that price against repairs you might never need.
- No. 0376 Fat-Tailed DistributionsYour insurance budget survives hundreds of ordinary claims, then one warehouse fire costs more than all of them put together.
- No. 0591 Marginal AnalysisThe hotel offers a room upgrade for $40, and you pause before clicking.
- No. 0599 Mean vs. MedianYour boss announces that average pay is $100,000, and nobody at your lunch table earns anything close to it.
- No. 0694 Opportunity CostYou accept a Saturday overtime shift, then realize it costs you the only afternoon you could spend with your visiting sister.
- No. 0698 Option ValueYou pay a little extra for a refundable ticket because you still don’t know whether you can go.
- No. 0864 Risk vs. UncertaintyYour spreadsheet gives a new store a 12% chance of failure, though nobody can explain where the 12% came from.