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Zusammenfassung von The Laws of Wealth

Name: The Laws of Wealth
Rating: 4.3 (178 reviews)
Author: Daniel Crosby

Daniel Crosby

Psychology and the secret to investing success

4.3 (178 Bewertungen)

24 Min.

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Investments

Inhaltsübersicht

The Laws of Wealth
in 8 Kernaussagen verstehen

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Kernaussage 1 von 8

What’s in it for me? Become a savvy investor by acknowledging your limitations.

When you invest in stocks, you’re always weighing up risks against a possible return. But what if there is a whole area of risk that you’re not aware even exists? Investors are used to being cautious about the risks of the market as a whole, such as a stock market crash or the health of a particular company. But one of the greatest risks to our investments comes not from the stock market, but from ourselves.

Behavioral risk, or the vulnerabilities of the investor herself, is one of the key factors to grapple with when investing. Like it or not, we are irrational. We get overwhelmed by information and can become panicky or overemotional. While we may fancy ourselves intuitive and astute, our judgment can be clouded by slick sales pitches and clever marketing.

This might sound dire, but don’t despair! In these blinks, we’ll tackle investor fallibility head-on by identifying potential pitfalls. We’ll also explore practical strategies for making smart and insightful investment decisions.

In these blinks, you’ll learn

why the price of wine has such a big influence on your enjoyment of it;
how to know whether you can trust the management of a company; and
why both panic and excitement work against you when making investment decisions.

We overestimate our abilities in life, and when we invest.

From an early age, it’s drilled into us that we should think positively and have confidence in ourselves and our skills. But what if that confidence is actually holding us back?

In one revealing study, American high school students were asked about how they thought their math skills compared to those of the rest of the world. A vast majority assumed that they were some of the best internationally. The truth is that American students are average at math. This is an example of overconfidence bias. That is, people assume incorrectly that they perform in a manner that is superior to other people.

In a similar vein, organizational researchers Tom Peters and Robert Waterman conducted a study in which they asked employees to compare themselves to each other and rate themselves on such qualities as interpersonal skills and physique. One hundred percent of the respondents thought that they were better than average at interacting with other people. 94 percent believed that their athletic prowess outranked that of their peers!

Not everyone they interviewed could have been a master of diplomacy with a bodybuilder’s physique. Evidently, the respondents overestimated themselves.

But what can a little self-confidence hurt, even if it’s misplaced? Isn’t it better than being horribly insecure?

Well, when it comes to investing, having an inaccurate view of your abilities can hurt very much.

If you believe that you have exceptional abilities, you will likely credit any wins on the stock market to your unique talent. However, you’ll believe that any losses are circumstantial and out of your control. That is called a fundamental attribution error. It states that we’re unable to judge the effects of our actions accurately. This perspective keeps you from learning from your mistakes and growing as an investor.

You may think that the rules of the stock market don’t apply to you. That can lead you to disregard risk and make reckless decisions because you’re so confident in your instincts. You might also be less likely to seek outside help from a trusted advisor.

Being humble about your abilities and being able to identify and learn from your mistakes are key to becoming a good investor.

Our emotions can affect our ability to make good decisions.

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.

One of the best investing decisions you can make is to get an advisor.

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.

Don’t panic about investment panic.

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.

Learn to identify a dodgy company by evaluating what the management does, not what it says.

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.

The highest price isn’t always right, so when investing, go for value over glamour.

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.

Be wary of being seduced by novel and exotic investments.

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.

We need to invest our money according to our personal goals rather than other people’s rules.

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.

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Worum geht es in The Laws of Wealth?

The Laws of Wealth (2016) is an insightful guide to understanding how our irrational behavior can get in the way of making good investment decisions. Using insights from the field of behavioral psychology, Daniel Crosby identifies key human weaknesses that can sabotage our investments, such as overestimating our abilities and panicking in the face of risk. He then presents practical and effective strategies that we can adopt to become better investors.

Bestes Zitat aus The Laws of Wealth

Our brains are far more like beer goggles than supercomputers, which means that the intelligent investor must take precautions to ensure the emotion of the moment is not warping his sense of reality.

—Daniel Crosby

Wer The Laws of Wealth lesen sollte

Investors wanting to learn how to spot their behavioral blind spots
Psychology buffs interested in how emotions influence how people spend money
Anyone who is weighing up the benefits of hiring a financial advisor

Über den Autor

Having completed his PhD in psychology at Brigham Young University, Daniel Crosby moved into the world of finance and became an expert in understanding how people’s behavior and emotions affect their investing decisions. Previously, he coauthored the New York Times bestselling Personal Benchmark: Integrating Behavioral Finance and Investment Management. He is also the founder of investment management firm Nocturne Capital.

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