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Blink 3 of 8 - The 5 AM Club
by Robin Sharma
The Laws of Wealth summary
Daniel Crosby
Psychology and the secret to investing success
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Key idea 1 of 8
4.3 (170 ratings)
24 mins
8 key ideas
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What is The Laws of Wealth about?
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.
About the Author
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.
Table of Contents
Key idea 1 of 8
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.
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Who should read The Laws of Wealth
- 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
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