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Top Ten Money Mistakes

In “Smart Money Decisions,” Bazerman identifies the most common fiscal foibles made by investors, shoppers, and gamblers

1. Overconfidence. Despite the various mental weaknesses associated with money, most people are dramatically overconfident in their decision making. Overconfidence is the engine that allows all of these other money mistakes to operate unchecked.

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2. Being Unprepared. A common and fatalistic belief is that either you’ve got it or you don’t. As a result, people ignore the benefits of thorough preparation in negotiation. Too many people “wing it” in important negotiations and make mistakes that could easily have been avoided. People assume that all the action occurs at the table, whereas in fact much of the important activity happens before the formal proceedings begin.

3. Ignoring the Cognitions of Others. So much information would become available to us if we would only think about the decisions of other people. Yet we are not very good at putting ourselves in another person’s shoes.

4. Mythical Fixed Pie. If I win, then you have to lose. This belief is an unfortunate and false model of most negotiation problems. It is also the common psychological barrier to finding mutually beneficial trade-offs.

5. Overweighting Momentary Impulses. I want it now! Frequently we make decisions based on fleeting momentary impulses that contradict our long-term interests. As a result, people engage in a variety of dysfunctional behaviors (such as smoking and running up high credit card debt) that cause them to wonder, “What was I thinking?”

6. Anchoring. You receive a low offer on your house and respond with a counter. What did you just do? You accepted the low offer as a reasonable starting point for the negotiation. Frequently, an early number in a negotiation anchors our decision without our awareness.

7. Escalation. Knee deep in the big muddy, throwing good money after bad, and entrapment are just a few of the terms that have been used to describe the psychological tendency to escalate commitment to a previous course of action.

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8. Focusing on Beating the Other Side. One of our most common instincts is to want to beat our opponent. Based on our earlier competitions, we inappropriately focus on our desire to win, rather than on making a good decision for ourselves. As a result, people getting divorced give too much of their assets to lawyers, and companies lose too much profit to dysfunctional competition.

9. Ignoring Your Alternatives. Power in negotiation comes from your alternatives. Your willingness to buy a different house, a different car, or a different company increases your power at the negotiation table. Yet most negotiators go into many of the most important negotiations of their lives without thinking about their alternatives. Falling in love with three (houses, cars, companies, etc.) rather than with one can be a very effective negotiation strategy.

10. Falling for Vivid Scares. Remember that top-of-the-line car or stereo you bought after reading rave reviews about its high performance in Consumer Reports? Despite your confidence that you were buying a reliable brand, the salesperson convinced you to buy an overpriced warranty. How did they do it? They helped you imagine the disaster that might occur if you passed on the warranty – they painted a vivid scare.

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