A hedge fund run by Nobel Prize-winning economists might sound like a no-lose proposition. But the investors burned in the mid-1990s by the spectacular losses of the now-notorious Long Term Capital Management fund would probably beg to differ. As LTCM's failure proves, even the biggest brain and the best education are no protection against common money missteps.
So much for that fancy degree
In Going Broke: Why Americans Can't Hold on to Their Money, professor Stuart Vyse cites a bunch of studies, many of them targeting Ivy League-level students, that reveal a plethora of everyday financial errors.
Spending too much on credit is one of the biggest pitfalls. We consumers tend to part with our money more quickly when we're putting things on plastic, but hang on to our dollars more when they're tangible bills in our hand. Similarly, investors can get mired in margin, buying stocks with money they borrow from their brokerage. A little margin can turbocharge your returns -- or amplify your losses, if the market or your investments turn against you.
Too much margin can leave you in a world of hurt. One Fool community member lost more than $60,000 trading on margin. My colleague Toby Shute detailed the even more costly margin-al adventures of Chesapeake Energy
Bedazzled by branding
Vyse illustrates another common error via a study of Cornell students. They were told to imagine they were hot and thirsty, and asked how much they'd pay for a beer from a fancy hotel or a grungy grocery store. They were willing to pay a lot more for the beer from the hotel -- an error described as "paying more for decor."
To me, the students' unwise choice also reflects branding power, which should be of great import to us as both investors and consumers. We'll pay more for a Dell
Brands can lead us to companies we're comfortable with, but that comfort can also come at an artificially high price. Being too loyal to brands means we risk putting more worth in a product's image than its actual value merits.
Whether you're buying socks or stocks, put a little more thought into the ways you spend every day. We can't all be Ivy League geniuses, but we can all be a little smarter about our money.
Being smart isn't just about how you spend your money. Let Morgan Housel show you how to avoid being a terrible investor, too.
Longtime Fool contributor Selena Maranjian owns shares of Chesapeake Energy and Coca-Cola, both of which are Motley Fool Inside Value recommendations. Coca-Cola is a Motley Fool Income Investor recommendation. The Fool owns shares of Chesapeake Energy. Try any of our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.