Money dangers we know -- but ignore

Blind optimism

Also known as willful ignorance or simple denial, this type of money blunder is all too common. Its hallmark is the phrase "It will all work out . . . somehow!"

Hillary Montgomery, a freelance researcher in New York City, had a moment when her common sense -- and possibly Suze Orman -- saved her from stumbling down this path.

A guy friend had won a $400 gift certificate to a women's designer shoe store and given it to her.

"While I was there, Suze Orman walked in," Montgomery says. "It was all we could do not to scream."

Montgomery found a pair of heels she could afford in the sale section, she says, but when she got to the register, the saleswoman said the gift certificate applied only to full-price items. At that point, Montgomery almost put the shoes on a credit card instead.

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"I debated in my head whether I could justify spending $400 for a pair of fabulous, once-in-a-lifetime pair of shoes," Montgomery says. (She was even tempted to ask Orman what she would advise, "but I didn't want to know her answer.")

Turns out financial sanity was in the air. "After a few minutes, I swallowed my pride, took the gift certificate back and walked out of the store," Montgomery says.

Ultimately, the knowledge that she wanted to get out of credit card debt -- not keep adding to it -- was a more powerful incentive than the shoes. And to avoid future temptation, Montgomery says, she returned the gift certificate to her friend.

Understanding money blunders

These stories showcase the failure of reason that typically sparks a major miscalculation, and they reveal powerful antidotes that can prevent a blunder before it happens:

• Listen to that little voice. Before you cast common sense aside, part of you lodges a protest. It may sound like a feeble squeak, but that's because you're turning a deaf ear to your better self. Before you ignore your instincts, take a day or two (or a week) to weigh what that voice is saying.

• Let your brain be your friend. The science of neuroeconomics shows that our financial decisions are often guided by more-primitive and impulsive centers in the brain. Luckily, we are also equipped with modern, fully functional cortical lobes. When making any financial choice, be sure to engage both sectors of your cerebrum.

• Remember who pays the bills in the end. It's tempting in this fiscally complex world to believe your spouse, best friend, mortgage broker or employer has your best interests at heart when they help you make a decision.

For example, research by retirement expert David Laibson, a professor of economics at Harvard, has shown that most people tend to stick with the default investment plan their employer chooses, even when it's not the most profitable choice. As if the boss really does know best.

Known as the flypaper effect, this phenomenon isn't limited to 401(k) plans -- it's a tendency to hand over the stewardship of our money, with often-calamitous consequences.

The fact is, no one is going to guard your financial present or future better than you are. As long as you stop blundering around when money is concerned.

Published Jan. 14, 2009

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