The Psychology of Money

Your World View is largely dependent upon your experiences, and the time you were born. For example – the whole perspective of a wealthy person who experienced high inflation during his growth years versus a person who only experienced stable prices with the least inflation will differ. Again, the son of an unemployed person and son of a successful stockbroker comes from different walks of life and they learn different lessons about risk and reward, investing and managing money.
We all think we know how the system works, but usually, we experience a very insignificant part of the world. That’s probably the first lesson - we know less than we think we do know.

People invest basis their experiences, and sometimes can tend to be irrational.

Example – An avg. low-income household spends about $400 on lottery tickets even though the chances of winning that lottery are extremely low. Surprisingly, the same low-income household finds it difficult to arrange for the emergency fund of $400. Is this behaviour rational? You never know; but it's not exactly illogical.

According to economists, the income of two siblings is more closely co-related than their height and weight. For example, if your brother is rich and tall, you are also likely to be rich and tall.

Take stocks. If you were born in 1970, the S&P 500 increased almost 10- fold, adjusted for inflation, during your teens and 20s. That’s an amazing return. If you were born in 1950, the market went nowhere in your teens and your 20s adjusted for inflation. Two groups of people, separated by chance of their birth year, go through life with a completely different view on how the stock market works.

We tend to underestimate or overestimate the role of luck in our lives. If someone else does well, we say that the person is lucky; if we succeed unexpectedly, however, we tend to believe it's because of our hard work and strategic timing.

Example – John D Rockefeller, one of the most successful entrepreneurs in history. When he started, he faced a lot of problems. The laws in the United States were not supportive of his businesses. He simply ignored them. In the hindsight, his success may be because he refused to let outdated laws come in the way of his innovation. But if he would have failed, we would have probably appreciated his example and way to wealth.

So, what to do? Well, stick to analysing patterns of success or failure. The more common the pattern of success, the more likely you can apply it to your life and financial goals. For example, studies have shown that people who control the structure of their days are more productive and happier with their work than those who don’t.

Rajat Gupta, a hugely successful investment banker, was born in a slum in Kolkata. He worked his way up and became the CEO of the Management Consultancy firm Mc Kinsey. When he retired in 2007, he was worth over $100 million. But he wanted to be a Billionaire.

In 2008, in the middle of the financial crisis, Gupta, who was a board member of Goldman Sachs, learned that Warren Buffett was to invest $5 Billion in Goldman to keep the company afloat. Sixteen seconds later, Gupta bought 175,000 shares of Goldman Sachs.

This was insider trading and hence illegal, but Gupta’s earnings from this investment further went on to make over $17 million in multiple deals. This didn’t make him a billionaire, but he landed up in prison. The moral of this story - envy and greed trigger bad calls. This can lead to far more losses than gains.

In 1927, Jesse Livermore, made a fortune on wall street and by the time he had reached age 30, he was worth thousands of dollars at today's valuation. Then, just before the stock market crash of 1929, he took a shot position, betting that stocks would decline, and he was correct. In a few days after the crash, he had made $3 Billion in today's valuation. He thought he was invincible now. He placed larger and larger bets until his fortune was gone. Finally broke and indebted, he took his own life just 11 years after in 1940.

Sometimes, getting rich is far simpler than staying rich.

Heinz Berggruen, who was forced to flee Nazi Germany, worked as a journalist with a side-line interest in Art Criticism. In 1940, he bought a small watercooler by an artist called Paul Klee for $100. And his passion for collecting modern art began. 50 years hence, in the 1990s Heinz became one of the most successful collectors of art in the world. In the year 2000, he sold his entire collection to the German government for over 100 million euros.

According to research, all collectors do the same thing – they buy a vast variety and quantity of Art. Some of these collections turn out to be multi-baggers while others are Duds. It’s a bit like an index fund, risks are evenly spread, and a few outliers make for exceptional results.

Conclusion –

Financial Decisions are a lot more complicated in real life than in textbooks. A lot of our investment decisions are not rational.
A lot of these decisions are driven by our experiences, the times we were born, and the current market conditions. Luck also plays a significant role.

The children of Millionaires who are more financially dependent receive more inheritance comparatively. For example, women who stay at home as unemployed adults receive more inheritance. Parents perceive these children require more independent support and hence require more financial support.

Final summary – Many millionaires don’t live a flashy Hollywood life. They usually live below their means, invest wisely, and budget intelligently. They are careful about their spending behaviours and patterns. Every person who wishes to be a millionaire should follow these simple yet effective steps.