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‘Luck & Risk’ – and “The Psychology of Money

Rajat Dhar July 5, 2024 Wealth Management Strategies Leave a comment 115 Views

Hey there! Let’s talk about a cool topic from the book “The Psychology of Money” by Morgan Housel, called “Luck & Risk,” and it’s all about understanding the roles these two factors play in our financial lives.

Imagine two friends, Jack and Jill. Both are hardworking and smart, but Jack ends up becoming a millionaire while Jill struggles financially. Is it because Jack is smarter or works harder than Jill? Not necessarily. Sometimes, it’s just a matter of luck and risk. This chapter helps us see that success isn’t always about being the smartest or the most hardworking person in the room. Luck and risk can make a huge difference in our financial lives, and it’s essential to recognize their influence.

Luck can be both good and bad, and it can affect anyone, regardless of their skills or efforts. Think about it: you might have an incredible business idea, but if you launch it during an economic recession, it might fail. That’s bad luck. On the other hand, you might invest in a random stock that suddenly skyrockets, making you lots of money. That’s good luck. It’s important to remember that luck isn’t always fair, and it can be a significant factor in our successes and failures.

Now, let’s talk about risk. Risk is the possibility that something bad might happen, and it’s closely tied to luck. When we take risks, we open ourselves up to both good and bad luck. For example, when you invest your money in the stock market, there’s a risk that the value of your investments could drop. However, there’s also a chance that they could grow, making you wealthier. The key is to learn how to balance risk with potential rewards.

In the world of money and investing, people often underestimate the role of luck and risk. They might think that someone who is wealthy must be incredibly skilled or hardworking. While that might be true to an extent, it’s essential to remember that luck and risk can play a significant role too.

Here’s an example: Imagine two investors, Alice and Bob. Both invest in the same stock, but Alice sells her shares when the price doubles, making a nice profit. Bob, on the other hand, holds onto his shares, and the price keeps going up. Eventually, Bob becomes a millionaire, while Alice only made a moderate profit. Was Bob smarter than Alice? Not really. He just happened to get luckier with his timing and took a higher risk by holding onto his shares for a longer time.

So, what can we learn from this chapter? First, remember that luck and risk are crucial factors in our financial lives. Sometimes, people succeed because of good luck or by taking the right risks, not necessarily because they’re smarter or harder working. Second, when we make decisions about money and investing, it’s essential to consider the potential risks and rewards. Don’t just look at the possible gains; think about what could go wrong and how that might affect your financial future.

In conclusion, understanding the roles of luck and risk in our financial lives can help us make better decisions and have a more realistic view of success. So, the next time you hear about someone’s financial success or failure, remember that it might not just be about their intelligence or hard work. Luck and risk play a big part too!