QUICK READ Personal finance experts deviate from economists

WHY does personal finance advice so frequently depart from economic theory? A new working paper suggests the former group tends to take psychology into account, while the latter is operating in a purely rational world. The paper’s author James J. Choi, a finance professor at Yale, first combed through the 50 most popular personal finance books, including well-known tomes like Robert Kiyosaki’s Rich Dad Poor Dad, Jesse Mecham’s You Need a Budget, and Ramit Sethi’s I Will Teach You to Be Rich, as well as multiple books by leading finance gurus like Suze Orman and Dave Ramsey. Then he compared the most common takeaways from personal finance books with the assumptions and principles of mainstream economic theory. Choi found that personal finance experts deviate from economists on the best approaches to saving, managing your financial portfolio, paying back debt, and home ownership. But while personal finance experts may be wrong about some things, Choi says their advice has two advantages over economic theory: It is easy for laypeople to understand, and they approach money matters with human constraints (such as the difficulty of sticking to a budget) in mind.

The paper, posted by the National Bureau of Economic Research, has not yet been peer-reviewed.