THE ROUGH GUIDE TO PSYCHOLOGYexample, research conducted by Terrance Odean at the University of
California at Berkeley looked at all the trades made by 37,000 people
between 1991 and 1997 and found that the more trades a person made,
the more money they tended to lose. Men were particularly prone to this
mistake, making 45 percent more trades than women on average.
The UK’s Office of Fair Trading (OFT) published an eye-opening
report in the summer of 2009. They asked a team of psychologists, led
by Stephen Lea at the University of Exeter, to look into the psychology
of scams. Perhaps the most surprising finding was that people with
more background experience in finance actually tended to be more
prone to financial scams – another powerful example of overconfidence
at play. Consistent with this, scam victims tended to spend more time
considering a would-be scam, not less, as you might expect, and it’s prob-
able that the time spent considering the scam made them even more
overconfident. Non-victims tended to simply delete or dispose of scam
material without giving it any consideration.
When faced with a suspicious financial proposal, it’s best to focus on
what you have to lose, not just on what you might gain. According to the
OFT report, each year in the UK 3.2 million adults (around one in fifteen
people) collectively lose around £3.5 billion to mass-marketed scams.
Related to financial overconfi-
dence is unrealistic optimism. A
good example of this is the way that
so many people continue using
credit cards even though they have
such high interest-rates. In 2007,
Sha Yang at New York University
surveyed nearly three hundred
credit-card users and found that
those who said they intended to
pay off their balance each month,
but actually didn’t, tended to use
cards with higher interest rates.
It’s as if their unrealistic optimism
was leading them to choose a card
that wasn’t in their best interest
- it’s likely they would have been
better off with a card with a higher
annual fee, but lower interest-rate
Spend now, pay later – the lure of the charges.
credit card.