The Reason You’re Not Rich

In recent years, the value of assets, especially homes, has seen a significant rise. Those who possess assets may feel a sense of relief, while those without may feel like they have fallen behind.

Did some people become rich with assets because of their abilities and intelligence, while others who were ignorant of finance were pushed to the fringes of society without even owning a home?

Morgan Housel, a former Wall Street Journal reporter and current columnist for The Motley Fool, has a different perspective.

In his book, “The Psychology of Money,” he argues that being rich relies heavily on luck rather than intelligence or hard work. When someone makes a lot of money, it is difficult to determine how much of it is due to luck, how much is a result of talent and effort, and how much is due to risk.

“The exact role of luck in successful outcomes”.

Housel once asked Nobel laureate economist Robert Shiller, “What do you most want to know about investing that we can’t?” Shiller’s response was, “The exact role of luck in successful outcomes”. This highlights the significant impact of chance in one’s success and wealth accumulation.

It’s not entirely accurate to say that intelligence and hard work are the only factors in accumulating wealth because people’s money decisions are influenced by their experiences. Individuals grow up in different countries, have parents with different values and income levels, and belong to different generations.

In a 2006 study of American consumers’ financial conditions, economists Ulrike Malmendier and Stefan Nagel found that people’s investment decisions are shaped by their experiences, especially during their early adulthood. Morgan Housel believes this means that a person’s willingness to take risks is determined not by intelligence or education, but by chance – specifically, where and when they were born.

Combining luck and experience is key to understanding the role of chance in investing. For example, someone who leverages their assets and buys into a rising market can become rich, but they are also vulnerable to losses if the market falls.

Investing successfully requires recognizing that luck plays a significant role in financial outcomes. The environment, background, and experiences of an individual also have a more significant influence than they might initially believe.

Investors should not become overconfident if they succeed, or too hard on themselves if they fail. Instead, they should focus on persevering and enduring, even in the face of unpredictable events. Although it may feel like things will never improve, history has shown that everything is cyclical and will eventually reach an end.

Overall, understanding the role of luck and experience in investing is crucial to taking a more balanced view of financial outcomes.