For the vast majority of people, money is an issue of vital importance. Whether it is because you have very little or because you have a lot, it is difficult that at least once in your day you do not think about something related to your finances.
These thoughts can vary in nature depending on how good a relationship you have with money. Some see it as an opportunity and others as a headache; And that bifurcation is what gives rise to the psychology of money and makes us wonder: what drives our financial decisions?
Morgan Housel, author, speaker, economic analyst, 2-time award winner Best in Business of the Society of American Business Editors and Writers and award winner sydney of New York Timeswas given the task of answering this question in his book The psychology of money.
What he found was incredible and the numbers prove it: 1.9 million sales and translations into more than 40 languages.
Morgan starts from a very interesting base and that is that we were instructed to make financial decisions from a mathematical and rational perspective. This, in theory, would not lead to errors.
If 10 is more than 5 and we all want to earn more, no one would make a decision that would lead them to earn 5 instead of 10. But why do some financial decisions lead us to lose money? Why can people from similar social conditions have such different economic realities?
What Morgan found is that these decisions are not made based on what we know, rather they are based on our behavior, which is very difficult to teach. So, what to do?
Next I am going to share 8 keys for you to make better financial decisions that will undoubtedly improve your psychology of money.
Psychology of money: 8 keys to make better financial decisions.
1. All people have their own experience of the economy and money.
We tend to think that we all see money in a similar way. However, our vision is tied to our experiences. Morgan tells a very interesting story to explain this point.
The great depression of 1929 was a severe blow to the world economy, which took almost 10 years to recover. During this period many families lost their homes and savings; many businesses went bankrupt and therefore poverty skyrocketed. The current narrative of that period is blunt: everything collapsed.
However, that experience was not lived by all the people of the time. For John F. Kennedy, who was president in 1960, from 1929 to 1939 he saw his family get more money. Only when he went to study and had more context of what happened, did he understand the world reality. (Remember that at that time getting information was not as easy as it is now)
In fact, his intention not to allow so much inequality was one of the flags that allowed him to keep the presidency.
The call at this point is to remember that we all have different experiences and when making relevant economic decisions, we must take into account the realities of others; since they can influence our results.
2. Our experience guides our financial decisions.
To have a healthy psychology of money, it is essential to recognize that it is our behavior, but not our knowledge, that drives us to take X or Y path; Y experience is the one that most influences how we behave.
If you are thinking that this is not so, let me tell you something:
In North America, low-income families spend an average of 400 dollars a year to buy the lottery. Ironically, these same families have the hardest time getting money when they have emergencies.
Do you know the probability of winning a lottery that plays with 6 numbers?…1 in 14 million!
The rational decision would be NOT to buy the lottery and have an emergency fund, but if you think about it, buying it is not illogical either. Because if you live with just enough, it is also very unlikely that you can get what the rich have; so the lottery becomes a possibility to achieve it.
Once we make it clear that our knowledge can take a backseat when making decisions, let’s see how our behavior is shaped by our experiences.
A study showed that the macro-economic conditions that a person lives in their youth have a great influence on the decisions they make in their adulthood. That is to say, his experience guides his behavior.
If you were born in 1970, in your teenage years the S&P 500 grew enormously. The study found that “70s” people, in their adulthood, were more willing to invest than people born in the “50s”, who during their youth did not see greater economic growth in the S&P 500 index.
In the same way with times of high inflation. If inflation was through the roof in your 20s, you’re less likely to invest, say in bonds, years later.
This shows us that even when market conditions change, our experience has already left a definite impression on us that shapes our behavior.
The call here is for you to analyze what was happening economically when you were young and try to detach yourself from your experience and analyze what is happening in the markets today.
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3. Luck plays a very important role in financial success.
We tend to think that if a person is doing well, it’s because they worked hard. And if things go wrong, we say that he is lazy and has no vision. In any of the 2 cases we leave a variable aside: Luck.
Apart from the ego that prevents us from seeing luck as a variable in our success, it is true that it is not easy to quantify. However, it is a highly relevant variable.
To better understand the psychology of money, Morgan refers us to economist Bhashkar Mazumder, who claims that if you have a brother who is tall and a millionaire, you are more likely to be a millionaire than tall.
This brings us back to the previous point and the importance of experiences. The most common thing is that parents educate their children by giving them the same opportunities, the same lessons, the same school, etc. This already has a component of luck.
However, our society does not reward investors who went bankrupt because market conditions changed. It only rewards those who amass fortunes, no matter how lucky they have been.
The call here is to analyze the successes and failures of others by studying very well how much good or bad luck they had.
4. Focusing on patterns and not on specific cases helps us make better financial decisions.
Going hand in hand with the previous point and in order to have an adequate psychology of money, you must internalize that you cannot replicate the luck that others have had.
Therefore, if, for example, you are obsessed with Elon Musk’s career, and you follow his tracks one by one, it is very unlikely that you will get the same results.
But if, on the contrary, you study the history of more successful entrepreneurs and extract the common elements in each of their paths, you are minimizing the importance of luck and you will be left with knowledge that will be easier to replicate.
The call here is not to stay with a single success story. We must find patterns from many stories that lead us to better decisions.
5. Envy makes you careless.
If you don’t have clear goals with your finances, you expose yourself to making mistakes, mainly because you have emotions that cloud your reasons.
Imagine that you are earning $180,000 weekly…Now think that the average (monthly) salary in Mexico is around $600. In this example, you would be earning 300 times more than an average Mexican. Pretty, right?
But now suppose that in your same company, there is a person who earns 1,400,000 dollars a week… Almost 7 times more than you… Your 180,000 doesn’t seem so much anymore.
This was the case of Marc-André ter Stegen, goalkeeper for Barcelona FC and Lionel Messi in 2020. The salary of the Argentine player, compared to that of his teammates, made it seem like little, regardless of the fact that $180,000 a week was a huge figure.
But if we now compare Messi’s 1,400,000 a week, against 290,000,000 that a manager in an investment fund can earn a week; everything takes on a new dimension and becomes even confusing.
Comparing ourselves is a shortcut to envy. And with envy we don’t think well.
The call here is not to act based on what others earn. Set clear goals and act accordingly. It’s okay to have ambitions but never let ambitions have you.
6. Amassing a fortune is easier than keeping it.
Winning a lot of money requires courage, risk, luck and perseverance. But maintaining the fortune you earn requires another mindset that turns the psychology of money on its head.
Jesse Livermore, like the Kennedy family, was one of the lucky few to experience the Great Depression. He went “short” trades and when the fortunes were liquidated and the investors were bankrupt, he was left with a haul of what would now be $3 trillion.
In the years that followed, Livermore thought he was unbeatable, so he invested again and again, racking up more and more losses. When his fortune ran out, he took his own life in 1940.
Maintaining a fortune requires something specific: Being afraid.
The call here is to view the next steps respectfully, contemplating as many variables as possible to gain the best perspective. If you think you’re never going to lose, you’ll go down a slide to defeat.
7. You can be wrong half the time and still win a fortune.
You don’t have to get every decision right. However, you should aim to win the majority or at least win the ones with the highest return. In his book The Psychology of Money, Morgan tells the story of Heinz Berggruen, one of the most successful art collectors in history.
Berggruen had one of the most impressive art collections, worth $1 billion. He had Picassos, Braques and many other brilliant artists. (In 2000 it was sold to the German government for “only” $100 million.)
When investigating how he managed to have so many paintings by the best artists, the answer was: quantity.
Most collectors buy many works, some gain a lot of value over time, however most lose it. But with the profits of the best works, the losses of the other works are covered -and by far-.
The call here is to remember that the better victories you have, the more losses you can afford.
Conclusion of the psychology of money.
Financial decisions go hand in hand with psychological factors, leaving aside logic and mathematical formulas. However, we can gain perspective when we analyze where we come from, what were the macroeconomic factors in our youth, and understanding that luck is part of development and influences our results.
Thank you very much for reading this far. We hope that you have learned something new and that the knowledge will be of help to you :).
And remember, if you are really interested in creating your own business, you can read our book “How to create a company while working: Discover how to manage your time, manage your money and motivate yourself while creating a company and working for another” , where you will find all the information you need to found your own company, without having to leave your job.
