Knowledge alone is not the sole determinant of financial success. Psychology plays a more significant role. Morgan challenges our perspectives to succeed with money and reaffirms our past beliefs.
Excelling with money has nothing to do with your intellect and a lot to do with your habits and attitude. Mindsets and emotions can either ruin your finances or establish them. And that is why ordinary people with no financial education can end up wealthy if they have good behavioural skills.
The author illustrates how Ronald Reed, a former janitor, made headlines when he died. He left behind $6m to charity and willed $2m to his stepchildren. What was his secret? Absolutely none!
He had no inheritance, and neither won any lottery. Ronald had good money behaviour. A Harvard-educated MBA holder, Richard Fuscone, went bankrupt in that same year. Fuscone was successful at his career in finance and made Forbes “40 under 40” list. Yet he lost it all due to his money behaviour.
What is the exact psychology behind money that levels the wealth playing ground for all individuals, educated or not? Well, I have picked my favourite five lessons from the book.
Lesson 1: People are different and not crazy.
This first lesson encourages us to be empathetic in judging people’s financial decisions, including ours. Different experiences can lead to tremendously opposing views about money.
Nothing is black and white as it seems. Few people make economic decisions purely based on logic. Our emotions, experiences, and opinions of the world vastly influence our choices. You may see specific actions or decisions as crazy, but those very decisions might be the wisest decisions I’ve probably chanced on.
Why is this so? People justify their decisions by reviewing the current information and fitting it into their thought and belief patterns, a unique model they developed through their experiences.
Take lottery tickets, for instance. It is mainly purchased by poor people.
“The lowest-income households in the U.S. on average spend $412 a year on lotto tickets, four times the amount of those in the highest income groups. Forty per cent of Americans cannot come up with $400 in an emergency. Which is to say: Those buying $400 in lottery tickets are by and large the same people who say they couldn’t come up with $400 in an emergency. They are blowing their safety nets on something with a one-in-millions chance of hitting it big.” (The Psychology of Playing the Lottery. https://awealthofcommonsense.com/2018/09/the-psychology-of-playing-the-lottery/)
Absurd, isn’t it? But since both of us aren’t in the lower-income group, it will be tough for us to grasp the unconscious reasoning of these ticket buyers. Many of these low-income lottery ticket buyers are paying for a dream. We may be privileged to access certain things that are only a pipedream to them, from health insurance to new cars, vacations, and even safe neighbourhoods.
They only gain hope for a brighter future when buying a lottery ticket. Though we may still not be convinced that buying a lottery ticket is a good idea, we can at least appreciate why it still exists.
“What you’re doing seems crazy, but I kind of understand why you’re doing it.”
Lesson 2 – The Relationship Between Luck And Risk.
“Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.”
When judging our own success and others, we need to always remember that nothing is as good or bad as it seems. We cannot attribute 100% of outcomes to decisions and efforts. Our outcomes are also drastically affected by the environment and circumstances we have no control over.
Morgan encourages us to focus on lessons from broad patterns instead of individual case studies as the complexity of these examples often makes it challenging to apply them to other situations.
Bill Gates attended one of the only high schools globally that had a computer. Unlike Bill Gates in eighth grade, most university graduate schools did not have a computer anywhere near advanced. There were about 303 million high-school-age people in the world in 1968 (United Nations). Only roughly 300 of them attended Lakeside School.
We can certainly not argue about how astonishingly intelligent, visionary and extremely hard working Gates is but, he also had a rare head start by attending Lakeside. In 2005, he told a graduating class that there would have been no Microsoft if there had been no Lakeside.
Lessons 3 – The Surprising Benefits of Compounding:
This lesson emphasises the relevance of patience in achieving financial success. In growth assumptions, what seems like small changes can lead to ridiculous and impractical numbers. Consider the famous billionaire Warren Buffet. Over 96% of his net worth came after his 65th birthday. Yes, $81.5b of his $84.5b was earned in his old age.
It’s hard for our minds to wrap our heads around such insanity. But that is the magic of time. We rarely stop to consider the potential of compounding.
Intuitively, devoting your time to learning and doing may seem like the best way to get rich. Linear thinking may seem more logical as opposed to exponential thinking. Good investing isn’t necessarily about earning the highest returns.
These high returns tend to be one-off hits that cannot be repeated. Your goal is to make pretty good returns that you can sustain and repeat for the most prolonged period. That’s when compounding runs wild.
Lesson 4 – Reasonability Over Rationality
When it comes to money decisions, most people tend to be very cold. However, we must remember that we aren’t spreadsheets but emotionally screwed up human beings. In the academic world, we find mathematically optimal investment strategies, but in the real world, people want strategies that maximise how well they sleep at night.
Rational investors make decisions based on economic facts. But when reasonable investors are making decisions, they consider their peace of mind. They think of their families, colleagues, and their own personal doubts. There is a social component in investment that we mostly ignore when we look at it through a strictly financial lens.
Imagine you invested in a promising company that you didn’t genuinely care about. Of course, you will enjoy the ride when all is well, but when things take a rough turn, and you begin to lose a lot of money, you will definitely take the least resistance path; Quit on the company.
Such a situation is highly burdensome. However, suppose you were found in an entirely opposite scenario where you actually cared about the company’s mission, products, or anything else.
In that case, there is a higher probability that you will be around when the company needs help. This motivation may be driven by feeling like a part of something meaningful or impactful. And this motivation is essential to sustain patience.
Not all financial decisions we make are based on logic. Most often, they are made to protect our peace of mind.
Lesson 5 – Wealth Is What You Don’t See.
The fastest way to lose all you have is to spend to impress others. Some people may look rich but are not wealthy. Ironically, true wealth is what you cannot see. Driving a flashy car, for instance, does not mean you are wealthy.
That may translate to having $100,000 less or $100,000 more in debt. When people dream of being millionaires, they don’t dream of having a million dollars in assets. They dream of spending a million dollars instead, which is a screwed up concept of wealth.
It’s easy to spot a rich person because your current income is what makes you rich. Contrarily, wealth is hard to spot. It’s the income we refuse to spend. Most of us learn by imitation, and the hidden nature of wealth makes it difficult to pick up the lessons of wealth.
“The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency. Keep this in mind when quickly judging others’ success and setting your own goals.”
Conclusion
When things are not going right with you, remember to exercise empathy and when it is, remember to stay humble. Keep in mind that many things influence our outcomes, from our erred mind frames to the role of luck and risks. Continue to be patient with your investments.
Sometimes all you need is time to succeed. Also, your decisions don’t always have to be rational. You are a human being in a social world. Protect your sanity. And lastly, don’t be preoccupied with proving your value to the world through flashy and unnecessary expenditure. Develop the self-confidence you need to tame your ego and invest in assets that will pay off.
I trust you enjoyed these nuggets from Morgan’s book. What are your own favourite lessons from his book?
By Awura Abena Amponsah, Co-CEO and Co-founder at Sumundi Ltd and Retail Consultant
