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: ‘Popular advice often deviates from economists’ advice’: Just how reliable are books giving tips on how to manage your money?

Intimated by a pile of debt? Wondering how much to save? Stumped on how much money to pour into the stock market?

If an individual reads a book offering personal finance tips and then talked to an economist about these same money questions, there’s a good chance they’d come away with different strategies.

That’s because “popular advice often deviates from economists’ advice,” according to a new paper from Yale School of Management Professor James Choi, released Monday by the National Bureau of Economic Research.

Choi surveyed the tips and teachings of nearly 50 books on personal finance from authors including radio show host Dave Ramsey, writer of Total Money Makeover, and Robert Kiyosaki, the author of “Rich Dad Poor Dad.”

Then he contrasted and compared those views against academic theories on the economically “optimal” ways a person ought to proceed when it comes to topics like debt management, savings and investment strategy.

“ Personal finance experts focus on habit and emotion in a way that economists could consider. ”

— Yale’s James Choi

Turns out personal finance experts and economists might each learn a thing or two from the other side, Choi said.

Personal finance experts focus on habit and emotion in a way that economists could consider, Choi said, while the experts could benefit from the economists’ global view of stock markets

At a time when high inflation is gnawing at savings accounts and the volatile stock market can pop high and drop low, regular consumers could benefit from hearing both sides. Here’s a look at some of the differences.


When it comes to figuring out how much money a person should be saving, the economic focus is on finding the best consumption rate. Then, the savings rate is “whatever the difference happens to be between income and optimal consumption,” Choi wrote.

So, theoretically speaking, it’d be okay for a worker in their 20s to save less because they are making less and when they earn more in the career that’s still in front of them, they can save more.

“Because income tends to be hump-shaped with respect to age, savings rates should on average be low or negative early in life, high in midlife, and negative during retirement” Choi wrote, explaining the economic view.

“ A common personal finance refrain is ‘paying yourself first,’ where you invest for the benefit of your future self. It’s the other way around in economics.”

But the personal finance books Choi reviewed often hit at the importance of saving early and often, as a disciplined habit applying no matter the income. “That is something that’s totally off the radar screen for economists,” Choi told MarketWatch.

Another difference is the “mental accounting” that personal finance experts often assign to money. That means noting that certain money is meant for certain purchases or scenarios, like an emergency fund. “Standard economic theory does not earmark portions of household savings for specific purposes,” the paper noted.

And then there’s this personal finance takeaway: “Pay yourself first.” Individuals should above all else save and invest for the benefit of their future self. It’s the other way around in economics, Choi wrote, saying, “economists conceive of current consumption as the carrier of utility and saving as a current sacrifice.”


When it comes to stock market investments and returns, a common refrain from personal finance experts — but other market-watchers, too –— is to focus on the time in the market, not timing the market.

Though long-term investing is critical, Choi said much personal finance advice on investing and asset allocation “oversells” the promise of eventual gains. “It is just not true that over the long run the stock market is guaranteed to go up,” he told MarketWatch.

This has been true in America so far in the past century — but research on other markets across the globe offer cautionary tales, he said.

Choi pointed to countries like Japan with its “lost decades.” The Nikkei 225 index

is still below its late 1989 peak of nearly 37,000 and last month closed at 27,910.

At the same time, Choi said personal finance experts “undersell” the value “human capital” plays in a person’s portfolio. In other words, a worker’s capacity to keep raking in paychecks and putting money into investing accounts. Just eight of 47 books discussed this concept as a relevant factor when thinking about asset allocation, his study noted.

“‘It is just not true that over the long run, the stock market is guaranteed to go up.’”

— James Choi

Choi isn’t questioning the importance of lowering investment risk later in life. But the academic research suggests the lowered risk could be done “more modestly, and starting at a later age than popular advice would say” once the concept of human capital gets factored in, he said.

Of course, that gets back to the willpower and emotion that plays into savings advice. Some investors may feel uncomfortable with raising their risk profile, no matter what economic theory might argue.


For economists, paying off high-interest debt first is “a very basic principle of optimal debt repayment,” Choi wrote.

Here’s the thing: 10 of the reviewed authors, including Ramsey, say people shouldn’t prioritize high-interest debt, while 10 books endorsed that approach.

Instead, borrowers might consider the debt snowball method for which people move from smallest debts to bigger ones, no matter the interest rate, to gain psychological momentum in the mission to get debt free. Ramsey, who Choi wrote is “famously associated” with the snowball method, could not be immediately reached for comment.

Twelve of the books said it’s critical to avoid more borrowing in order to pay off debt. That might help explain an economic puzzle why many households carried high interest debts like a credit card balance while keeping cash in low-interest savings accounts, Choi said.

“ Economists will argue that the most efficient move in lowering debt is paying off the highest-interest accounts first. ”

The average annual percentage rate (APR) for a new credit card in August was 21.4%, up from 20.8% a month earlier, according to LendingTree. The annual percentage yield (APY) on savings accounts in August were 0.13% according to, though online accounts could push higher.

Both rates get pushed up when the Federal Reserve hikes a key interest rate, which the central bank sounds prepared to continue doing.

The most efficient move would be paying off high interest debts. But in the eyes of many personal finance authors and the people who read them, “it’s all about the motivation and not necessarily about maximizing the economics of the situation,” Choi said.

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