The Laws of Wealth summary

Who doesn’t love sobbing while watching a sad movie, or feeling excitement flooding through your body when falling in love? Extreme emotional states make life interesting. However, when it comes to investing, extreme emotions can impede your decision-making skills. 

In an experiment conducted by social psychologist Jennifer Lerner, participants were divided into two groups. One group was instructed to watch a scene from a sad movie and then write about it. The other group was given a short, boring video clip about fish to watch. Afterward, they were asked to write about their daily activities.  

Investors may have all the rules in their heads. They may have read a zillion books and learned that they need to plan carefully and avoid impulse buying. However, knowing is not enough. 

This is why hiring an advisor is essential. Research has shown that advisors have a critical influence on helping investors make better decisions and stick to the investment plans they have chosen. 

Imagine investing part of your life savings in a company, only to hear that the company is being investigated for fraud. Chances are you’ll be flooded with feelings of panic. 

Unfortunately, as an investor you’ll be bombarded with information by news organizations hungry for scandal and disaster. If you’re not careful, you’ll be unduly influenced by such reports, and end up acting out of fear, instead of good sense. 

We’ve all heard the cautionary tales about con artists operating on Wall Street. Nobody wants to be suckered into investing in the next Ponzi scheme. But how can we avoid falling prey to the Bernie Madoffs of this world?

We may like to think that we’d be able to see through a con artist, relying on our intuition and powers of detection. Unfortunately, research has shown that we’re terrible at detecting when someone is lying.

Would you pay $52 for an old, burnt oven mitt? What if you were told that that oven mitt had belonged to none other than the famous chef and cookbook author Julia Child, and that it had gotten burnt as she was making her first-ever batch of delicious beef bourguignon?

Chances are you’d be much more willing to reach into your pocket to acquire something with such an interesting and socially significant past. 

In the early 1600s, the tulip came to prominence in the Netherlands. People were astonished by its beautiful color, and an exotic shape they had never seen in a flower before. Tulips became the ultimate status symbol. As demand increased, so did the price. People became willing to pay up to ten times a worker’s annual salary for just one bulb. In 1637, the tulip frenzy spectacularly crashed in what is thought of as the end of the first speculative market bubble. 

What is it about the new and exotic that elicits such great enthusiasm? After all, the tulip bubble has been repeated over and over in economic history. 

How much money is enough? There are so many different ways to answer that question. You could look at guidelines that say you need to have ten times your annual income saved to be financially independent. Or you could compare yourself to your neighbors and decide that when you have a fancier Ferrari than theirs, then you will be doing well. 

The best way to answer that question is actually to look inward rather than outward. Each of us has a unique “hierarchy of needs” – the things that are most important to our fulfillment in life. After the obvious common human needs like food and housing have been met, personal needs can differ wildly. Some people need several times their annual income in savings to feel secure and pay for their children’s college education. For others, it’s much more important to have ready cash at hand to fund experiences like traveling the world.