Why Do Smart People Keep Making the Same Money Mistakes?

Classical economics assumes humans are rational optimisers. Behavioral economics, pioneered by Daniel Kahneman and Amos Tversky (Nobel 2002), shows the opposite: humans use mental shortcuts that lead to predictable, costly mistakes — especially in financial markets where stakes are high and feedback is slow.

Key biases: Loss Aversion — losses hurt ~2–2.5× more than equivalent gains feel good (Kahneman-Tversky). Anchoring — first number seen becomes reference point for all judgments (IPO reference price, 52-week high). Herding — following the crowd feels safe and drives bubbles. Overconfidence — investors overestimate forecast precision, leading to under-diversification and excessive trading. Disposition effect — sell winners too early (realise gains), hold losers too long (avoid realising loss). All five directly degrade long-term investment returns.