The Psychology of Money

Finances are crucial in our lives. However, discussions about them are infrequent and people often neglect to educate themselves on this subject. Over the years, numerous presumptions and false ideas about money have emerged. Many believe that wealth is attributed to luck, inheritance, or even the exploitation of others.

This is incorrect. Money is a globally circulating universal asset. You can achieve financial independence by changing your mindset and adopting wealth-growing practices. First, acknowledge your financial situation. Biassed financial decisions hinder your current life from aligning with your desired life.?

Emotions like status, envy, and others can greatly influence your financial decisions. Morgan Housel's book, "The Psychology of Money," offers practical advice for improving your finances, starting today.?

Lesson 1 : To effectively manage your money, it's best to avoid greed.

Are you greedy? No. That's what you tell yourself. We tend to have a positive self-image and attribute our misfortunes to bad luck. Jesse Livermore, born in 1877, was a stock market trader.

He bet on the market decline before the 1929 crash. He earned more than $100 million, which is equivalent to $1.6 billion in today's currency.

Instead of enjoying his wealth indefinitely, the successful trade made Livermore feel invincible. Soon, he lost all his earnings due to making incorrect trades. The sudden downfall pushed him to the edge, and sadly, he ended his life one night.

The issue was that his success fueled his desire for an even larger piece of the cake, despite already having more than anyone could hope for. The lesson is: Avoid greed and embrace humility.?

Once you have achieved your desired goals or accomplished significant milestones in life, it is important to cultivate gratitude, preserve your achievements, and find joy in the present moment, rather than constantly striving for more. If you fear losing everything you have, you won't be willing to take risks for potential gains.When managing your money, it's best to avoid greed.

Lesson 2 : Envy can lead to poor decision-making due to strong emotions.

Investing requires time. Investors aim to remain committed to their investments despite market fluctuations, but occasionally, the fear of missing out or envy can hinder their decision-making process, often occurring simultaneously.

To achieve financial independence, it is crucial to prioritise the management of your emotions. Remember, your journey is unique. Don't compare yourself to others or be envious of their accomplishments.?

Consider Rajat Gupta, the ex-CEO of McKinsey, as an example. Despite his humble beginnings and achieving a net worth of $100 million, he still felt envious of Warren Buffett, who was a billionaire. He committed insider trading, a common and dangerous financial crime for investors, and received a substantial prison sentence as a result.?

He allowed envy to consume him and suffered the consequences greatly. Was it worth the effort? No. His misfortune is a valuable lesson for those seeking to improve their financial decisions. Be logical and consider carefully when making decisions about money. Always control your emotions.

Lesson 3 : Our early life experiences shape our financial decisions.

Everyone has a unique upbringing. Was your childhood similar to someone born in the 1800s or 1900s? No.

Some people experience financial crises during their upbringing. Most people only become familiar with bull markets once they reach their 30s. The two types would have contrasting opinions on investment strategy, portfolio composition (stocks or bonds), and risk tolerance.

A study by Ulrike Malmendier and Stefan Nagel reveals that people's investment decisions are influenced by the economic conditions they experienced during their young adulthood, highlighting the presence of hidden biases. Experiencing high inflation may lead someone to view bonds as a poor investment, whereas going through turbulent times may cause someone to think the opposite.?

Recognising and addressing our hidden biases is crucial for reducing them and making improved decisions. Financial decisions should be based on thorough analysis, reliable facts, and a willingness to consider different perspectives and constructive criticism.?

Additionally, it is important to enhance your adaptability to changing trends and overcome any fear of embracing new ones, even if they challenge your personal beliefs. The money market is objective, unbiased, and discourages impulsive decisions. Hasty investments can erase years of savings, while wise ones can accelerate your path to financial freedom.

If you think you've made poor financial choices or believe that becoming wealthy is out of reach, The Psychology of Money is the perfect book for you. Reading it will broaden your perspective and prompt introspection to recognise your own biases. This book offers practical steps for immediate financial improvements.