Avoid Mental Accounting and Stop Losing Money

Avoid Mental Accounting and Stop Losing Money

Can you stop yourself from mental accounting, the tendency to look at just one part at a time rather than seeing the greater whole?

Can you keep yourself from getting distracted by the small details that seize your attention?

If your thought pendulum swings too far in one direction and you only consider yourself a “big picture” thinker, you could easily miss the important facts that are on your statements.

As documented in the popular book, The Invisible Gorilla, by Christopher Chabris and Daniel Simons, people often suffer from the “illusion of attention,” believing that they see an entire scene but actually missing what’s right in front of their eyes. The authors, both cognitive psychologists, present cases of how even experts overlook incredibly important hazards. For example, they note how an experienced airline pilot did not see a plane on the runway where he was about to land. And they ask how a veteran nuclear submarine captain could not see a 200-foot fishing boat that was right in the middle of his periscope view screen. Could a radiologist looking at an x-ray just miss seeing a guidewire in a patient’s chest?

Chabris and Simons explain that people believe that they can pay attention to the world around them, but in fact, they frequently miss obvious impediments because they just don’t expect them.

If this happens to experts, then surely armchair portfolio managers and amateur chess players alike will also miss critical information, even if The Wall Street Journal or some internet site screams the news in a headline. (Take a look at some of Chabris and Simons’ videos at www.invisiblegorilla.com.)

If someone supplied you with that ideal one-page summary of your entire financial world, could you absorb the whole thing, or would mental accounting and the illusion of attention make you focus too much on one area or simply miss some critical fact?

Watch out!

Improve your efficiency by getting an extra set of eyes to review your statements. Sit with your spouse, trusted friend or family member, or professional advisor to go over your affairs. Having an objective viewer offer insights helps to ensure that you don’t miss a crucial element on your money board.

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