Naturally, the solution is dependent on the writer. Some people are involved with dubious get-rich-quick scams, promote the benefits of positive thinking, or seldom ever give any sensible advice at all. However, even the most realistic financial guidance books deviate noticeably from the economists' best conclusions.
Popular books can occasionally be inaccurate. For instance, it's a prevalent belief that the longer you keep equities, the safer they get. It's untrue. Whether you own them for a week or a decade, equities offer high risk and more return. Over a long time horizon, they have a greater chance of outperforming bonds, but they also have a greater chance of experiencing a crisis. Choi believes that this fallacy, despite its faulty reasoning, causes minimal harm because it results in sensible investing plans.
Other distinctions, though, should encourage the economists to reconsider some points. For instance, it is common economic wisdom to pay off high-interest debts first, followed by lower-interest ones. But as a self-help life hack, many personal finance books recommend prioritizing the lowest debts first. If you follow their advice, you'll start to see that there is a way out of debt.
If you find any logic in this, it shows that the conventional economic advice has a blind spot. People make mistakes because they are susceptible to temptation, miscalculate expenses and risks, and are incapable of understanding complicated financial laws. This will be considered by sound financial guidance, which should also provide protection from the worst mistakes. Though behavioral economics has a lot to say about these mistakes, it has a tendency to place more of an emphasis on policy than on self-help.
Another flaw in conventional economic wisdom is its inability to deal with what the seasoned economists John Kay and Mervyn King refer to as "radical uncertainty" - ambiguity not just about what could occur, but also about the nature of the possible outcomes.
For instance, the conventional wisdom in economics is that we should spread out our consumption throughout our life cycle, taking on debt while we are young, saving during our successful middle years, and then enjoying our capital when we are retired. But the notion of a "life cycle" lacks imagination regarding all the potential events that may occur over a lifetime. Young people may die unexpectedly, pay off a lot of money to divorce, leave well-paying professions to pursue their hobbies, inherit tidy sums of money from wealthy relatives, receive unexpected promotions, or have long-term illnesses. These scenarios are not improbable, and since life is so unpredictable, the concept of distributing consumption in the best possible way over a long period of time begins to sound really bizarre. Although it may be ineffective, the time-tested financial advice to save 15% of your salary no matter what has some resiliency.
Another omission from the conventional economic worldview is that we can just waste money on things that don't matter. Many financial sages emphasize this very fundamental concept: we spend mindlessly when we should spend mindfully. These financial sages range from the ultra-frugal Financial Independence, Retire Early (FIRE) movement to Claer Barrett's book What They Don't Teach You About Money. The concept is crucial, yet there is no way to even put it into economics terminology.
The study of economics may impart a wealth of knowledge about money, allowing for both justifiable pride in certain areas and justifiable humility in others. But study also leaves out a lot. James Choi should be commended for realizing that financial knowledge is not just the domain of economists.
