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Popular Personal Financial Advice versus the Professors

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Popular Personal Financial Advice versus the Professors

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Learn why people make unsound personal finance choices and what economists recommend instead.

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  • Applicable

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If you’re looking to put your finances in order, the plethora of available advice can be puzzling and contradictory. Tips in popular finance books are sometimes based on fallacies; economists’ recommendations, meanwhile, don’t take human psychology into account. To bring some order to the chaos, finance professor James J. Choi studied 50 best-selling personal finance books and compared their advice to that of academic economic models. Readers will need expertise to follow Choi’s analysis, but his conclusions can aid anyone in making rational choices about personal finances.

Summary

Advice in popular personal finance books often differs from economists’ recommendations – sometimes radically.

Millions of Americans make financial choices on the basis of advice they find in popular personal finance books – such as Robert Kiyosaki’s Rich Dad Poor Dad, which has seen sales of 32 million copies over the past quarter-century. But the recommendations of popular personal finance authors often differ dramatically from the advice of academic economists. In some cases, authors’ advice reflects economic fallacies, and people would get better results if they followed sound economic advice. But personal finance authors tend to take psychological factors into account that economists don’t – so, for everyday people, their recommendations might work better in practice.

Economists...

About the Author

James J. Choi is a professor of finance at the Yale School of Management.

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