The Geometry of Wealth summary

Insecurity might be on the rise, but that doesn’t mean we’re doomed to monetary misery. Luckily, we all have a powerful tool for solving financial problems – the human brain. Now, the brain isn’t all-powerful, and it can’t resolve every conundrum or make us all financial moguls. But it does give us some leverage.

Let’s start by looking at our brains’ limitations. In his book Thinking, Fast and Slow, the psychologist and economist Daniel Kahnemann argues that our default cognitive setting is “fast thinking.” This is an automatic reflex triggered by events in the world around us. When you’re driving a car and see someone dart into the road, for example, it’s fast thinking that makes you instinctively hit the brakes.

The seventeenth-century French philosopher Blaise Pascal had an interesting take on two of the biggest questions of his day – God and faith. According to Pascal, the decision to believe or not believe in God is a wager, and this explains why it’s better to have faith. If God does exist, you reap huge rewards. If you believe but it turns out that he doesn’t exist, you don’t lose anything. Belief, in other words, is simply a lot less risky.

So what does this have to do with money? Quite a lot, actually. Minimizing risk isn’t just a sound strategy when it comes to belief – it’s also a great way of approaching financial decisions.

Now that we’ve explored general approaches to managing your finances, it’s time to look at the specifics. Let’s start with something very few of us ever get around to doing – working out our own net worth.

This is extraordinarily effective. Even better, it’s easy to do.

Financial health isn’t just about balancing budgets and picking the right investments. In fact, it’s just as important to consider less-tangible things – like practicing gratitude, for example. Sound strange? Actually, it makes a whole lot of sense.

The truly wealthy have more than material riches – they’re also happy. Why? Well, as psychologist and world-leading gratitude expert Robert Emmons notes, thankfulness is a key component of happiness. Put simply, expressing gratitude makes you feel good.

Before we talk more about money, let’s take a moment to rewind back to the 1840s. Our setting is a maternity ward in a hospital in Vienna, Austria, where a doctor named Ignaz Semmelweis is pondering a strange situation. The death rate among women giving birth on his ward is one in ten. The death rate among women during so-called “street births,” by contrast, is just one in 25. What was going on? 

Semmelweis racked his brain for solutions. In the end, with the benefit of hindsight, the answer became glaringly obvious – it’s safer to give birth outside a hospital than to be treated by a doctor who hasn’t washed his hands. And that’s the lesson here: simple answers are usually the correct answers. 

Finance is often associated with sophisticated equations and algorithms that make complex market movements perfectly knowable and predictable. Unfortunately, this just isn’t the way investment works.

In reality, investing isn’t the precise science it’s often made out to be. Paradoxically, this is actually a good thing – after all, it means that you don’t have to be a math genius with five PhDs to make money on the markets.

Ask your mother or your neighbor what kind of return you can expect on your stocks and they’ll likely name a figure like ten percent. This reflects the common sense understanding of how investment works, and it’s not a million miles from the truth: the return on most investments is pretty predictable.

According to data collected by the Ned Davis Research Group, for example, the average yearly return on investments in stocks is indeed about ten percent. During the first two years of an investment, average returns actually rise slightly above that number due to swings in company performance. These typically have a larger impact over the short term than they do over the long term.