Investing money properly needs to be learned.

Probably every investor has a few books on the shelf at home that promise the best tips for investing.

So does James Choi, professor of finance at Yale University in the United States.

When he was preparing a course for his students, he browsed through the most popular finance books and found that a lot of the advice given by the authors differed fundamentally from the economic theory that the professor found in his academic literature.

Sarah Huemer

Editor in the "Value" department of the Frankfurter Allgemeine Sunday newspaper.

  • Follow I follow

James Choi then decided to address these contradictions.

He has read 50 financial books, some of which have sold millions of copies.

In a recently published study, he compared this with economic theory.

And identified major differences.

Because in contrast to most economists, financial gurus assume a different view of humanity.

They do not necessarily rely on people always making rational decisions.

And rather give tips that rely on the motivation and perseverance of investors.

However, this in turn means that their advice is often a worse solution from a purely financial mathematical point of view.

This is the case with loans, for example.

Economists recommend paying off the loan with the highest interest rate first.

Ultimately, this saves money.

The bestselling author David Ramsey, on the other hand, chooses a different approach, the so-called debt snowball method.

He advises his readers to always pay off the smallest loan first – even if it has a lower interest rate.

It's about changing people's behavior, he argues.

Quick wins would help boost motivation.

Constant savings rate, yes or no?

Another tip from many authors is to always save at least ten percent of your income over your lifetime.

That sounds perfectly reasonable.

But it also contradicts the assumptions of economists.

These assume that people will adjust their consumption and the amount they save over their lifetime.

A student or young professional, for example, hardly saves any money.

According to the theory, the more income increases with age, the more the savings rate increases.

Mathematically, this can also make sense, after all, the few euros saved from the student budget are hardly significant later.

What is forgotten here, however, is that people often find it easier to establish a habit and maintain it.

Developing the will to save is “no problem for the fictitious economic agent in our models,” says Choi.

He therefore appeals to his academic colleagues to give greater consideration to factors such as motivation in their analyzes - which is increasingly happening in behavioral economics.

In any case, it is advisable for the investors themselves to be aware of these deceptions through their own psyche and not to blindly follow the advice of the gurus.

Then you can make smarter financial decisions.