How we approach money is shaped by our experiences, upbringing, and culture.
The Great Depression is a well-known story, but it leaves out the fact that not all Americans experienced it in the same way. JFK admitted that his family's wealth actually grew during the depression.
People from different walks of life have vastly different experiences and lessons about money. Even equally wealthy people can have different financial worldviews based on their individual experiences -- one might be raised during periods of inflation while the other experienced stability. What we think we know about the economy and money only reflects a fraction of the whole truth.
Economists often assume that individuals make rational financial decisions that maximize their returns, but in reality, people's financial decision-making is more complex. For example, low-income households in the US spend a significant amount on lottery tickets despite struggling to afford emergency expenses. This behavior is not rational, but it is understandable as people see it as their only chance to access luxuries they cannot afford otherwise.
Personal history determines people's attitudes towards risk, with experiences in early adulthood shaping investment decisions later in life. Economic conditions during these formative years can greatly influence investment choices, even when real-world evidence contradicts them.
Research shows that people's willingness to invest in bonds and stocks largely depends on the inflation rate and stock market performance during their early adulthood.
The economic concepts we use today are relatively new. The first currency was only issued around 600 BC, and retirement as we know it today is less than two generations old. Other key ideas and practices, like hedge funds, index funds, and retirement funds are even newer. The reason many of us struggle with financial planning and decision-making is not because we're stupid, but because these concepts are still historical infants.
Luck is a significant factor in financial success, but it is often overlooked or underestimated due to human psychology and cultural obsession with success. We tend to attribute our successes to hard work and failures to bad luck or character flaws, but we are less generous when it comes to others' failures.
The income of siblings is more closely correlated than height or weight, indicating the sizable role of inherited privilege and opportunities in financial outcomes.
Building randomness into financial models can help account for luck, even if we cannot fully quantify its exact role.
“Success is a lousy teacher” because it can make people overconfident.
It is important to consider the role of luck in success, and to not let a few isolated examples of success lead you to believe that you are guaranteed to succeed if you follow their steps.
It is better to focus on broad patterns of success and failure, and to use these patterns to make better decisions in your own life.
For example, studies have shown that people are happier when they structure their days. This is an applicable pattern of success.
Envy can drive bad decisions, particularly in the pursuit of more wealth. Capitalism can exacerbate this by creating a culture of comparison. Envy is not inherently morally wrong but can lead to reckless behavior.
Rajat Gupta, a former CEO of McKinsey and a board member of Goldman Sachs, was sentenced to prison for committing insider trading even though he was already extraordinarily wealthy.
Making money can be harder than keeping money.
Jesse Livermore was a successful stock trader in early twentieth-century America, worth $100 million in today's dollars at the age of 30. He made a fortune by shorting stocks just before the crash of 1929, but subsequently lost it all by making larger and larger bets.
40% of publicly traded companies eventually lose all of their value.
Do not spend money to show off your money. That's the fastest way to lose money. Savings = Income - Ego.
The most successful entrepreneurs endure by having perseverance and humility, and minimizing risky behavior.
It is possible to make a fortune even if you are wrong most of the time. The key is to spread your risk and invest in a variety of assets. This is because of the long tail, where a small number of successes offset a large number of failures. For example, if you invest in 100 different stocks, you only need a few of them to excel in order to make a profit.
Heinz Berggruen bought a small watercolor by Paul Klee for $100 in 1940, which was the beginning of his lifelong passion for art. By the 1990s, he had amassed a large collection of art, many of them by unknown artists. However, it also included Picassos, Klees, Matisses, and Braques, and so his collection is worth about $1 billion.
One of the most important things we can do to improve our financial lives is to develop a long-term perspective. We should set clear goals and align our financial decisions with those goals. We need to learn to think about money in terms of decades and generations, rather than just short-term gains or losses.