Alert
Close

Think you know AARP? What you don't know about us may surprise you. Discover all the 'Real Possibilities'

Highlights

Open

You and Your Town Contest-You could win an AARP RealPad

AARP Auto Buying Program

Contests and
Sweeps

$10,000 Winter Escapes Sweepstakes

Beat the cold and cozy up to a chance of winning $10,000! See official rules.

Driver Safety

Piggy bank on the road - AARP Driver Safety

Take the new AARP Smart Driver Course!

AARP Books

Visit the Money Section

Enjoy titles on retirement, Social Security, and becoming debt-free.

Jobs You Might Like

most popular
articles

Viewed

Test Your Money Instincts

Experts warn that your financial instincts might be costing you money

Question #2

How do you pronounce the capital of Kentucky: "Loo-ee-ville" or "Loo-iss-ville"? Now, how much money would you bet that you know the correct answer: $5, $50, or $500?

This question, from the behavioral-economics book Why Smart People Make Big Money Mistakes (1999) by Gary Belsky and Thomas Gilovich, is really a trick: Kentucky's capital isn't Louisville; it's Frankfort. While you were congratulating yourself for knowing the s in Louisville is silent, you probably didn't stop to wonder if that was all you needed to answer the question — a display of the human tendency toward overconfidence.

Excess confidence leads people to think too highly of their own skills — even in areas in which they aren't very skilled. Eric Dahm, an investment adviser at Human Investing in Portland, Oregon, sees this in clients who hold a lot of retirement savings in their employer's stock. "When we point out the danger of having a large portion of assets tied up in one stock, they'll often respond, 'I work here, I see what they're doing, and I think this stock is going up forever,'" Dahm says. "I watched one client do that — and he rode the stock from $60 a share all the way down to $3."

One way to combat overconfidence is by avoiding the temptation to use your stock-picking skills to invest in individual companies. Instead, select a handful of highly rated mutual funds — no more than half a dozen — that invest in diverse companies in different parts of the world.

Question #3

You're picking out a movie to watch tonight. Lowbrow comedy or highbrow art film? Now imagine you're picking a movie to see in two weeks. Which type will you want then?

In a 1999 study published in the Journal of Behavioral Decision Making, researchers found that 56 percent chose the popcorn flick for tonight and 44 percent went for the more intellectual option. But wait: Move the date forward by a couple of weeks and 71 percent picked the art film. Blame "hyperbolic discounting," which is a wonky way of saying that we prefer immediate rewards and postpone things we think will be good for us.

This sort of choice pits two different decision-making processes in the brain against each other. One side — Thaler calls it Mr. Spock — is extremely rational and deliberate; the other — Homer Simpson — is impulsive and emotional. And when the two of them fight, Homer tends to win: It can be hard for your Spock side to save for retirement when your inner Homer is drooling over big-screen TVs and other expensive distractions. The solution? Eliminate Homer by automating your savings. Your 401(k) plan does this brilliantly, spiriting your money away before you see it. Do the same with your IRA or emergency fund by setting up automatic transfers from your bank account. "Automatic savings plans are incredibly powerful, because they keep the part of your brain that's interested only in immediate rewards from participating in the decision," says Russell James, an associate professor in the department of personal financial planning at Texas Tech University. "That's a great way to get yourself to set aside more money for your retirement."

Michaela Cavallaro writes about personal finance and works on her self-control issues in South Portland, Maine.

You may also like: Live for today, save for tomorrow.

Topic Alerts

You can get weekly email alerts on the topics below. Just click “Follow.”

Manage Alerts

Processing

Please wait...

progress bar, please wait

Tell Us WhatYou Think

Please leave your comment below.

The Cheap Life

Jeff Yeager Cheap Life Ultimate Cheapskate AARP YouTube web series save money

Catch the latest episode of The Cheap Life starring Jeff Yeager, AARP's Ultimate Cheapskate. Watch

Discounts & Benefits

From companies that meet the high standards of service and quality set by AARP.

Life insurance: you are covered rain or shine

Exclusive annuities for members from AARP Lifetime Income Program from New York Life.

AARP Credit card from Chase

Members can get cash back rewards on purchases with the AARP® Credit Card from Chase.

Homeowners Insurance
Member Benefits

Join or renew today! AARP members receive exclusive member benefits & affect social change.

Rewards for Good

Your Points Balance:

Learn More

Earn points for completing free online activities designed to enrich your life.

Find more ways to earn points

Redeem your points to save on merchandise, travel, and more.

Find more ways to redeem points