Book Review: Think and Grow Rich by Napoleon Hill

EDITOR’S NOTE: I wrote the below review in 2014, after reading the book because it makes many Top 10 lists of favorite or best business books of all time. I still stand by my review, BUT was fascinated to read a long piece of research in December 2016 on Napoleon Hill’s life career. Hill was, it turns out, a complete con artist. Passing bad checks, setting up fake charities and pocketing the money, engaging in securities fraud and fake stock issuances, marrying five times and leaving each of his wives and children in the lurch, and running from the law throughout his life. It’s a fascinating account, and changes the context of this book. In all likelihood, he completely invented the “Andrew Carnegie personally asked me to research this” justification in his book. He made up his connections to famous people, including Presidents Wilson and Roosevelt. He serially lied and cheated his way through life. In that light, the purported ‘effectiveness’ of his advice is a complete fabrication of his imagination. But hey, who am I to say what works?]

Can you simultaneously find something personally un-appealing, yet respect its effectiveness, when considered on its own terms?  Of course you can. For example that’s my summary view of Miley Cyrus’ amazing career so far.

 I did not enjoy reading Napoleon’s Hill’s Think and Grow Rich – indeed some parts are pretty darn annoying – but I’m intrigued that wholeheartedly embracing the book could help you grow rich.  I’ll explain why I didn’t like it, but if some eager-to-get-rich kid asked me for a short-list of book recommendations for that purpose, I’d include this one.

 I’m not alone in thinking this one deserves to be ranked at the top of the genre-.  I’m making my way through the most highly recommended personal finance books of all time; Think and Grow Rich cracks the Top 10 of most lists.

 Napoleon Hill wrote his motivational book in the 1930s, after interviewing hundreds of successful men of business that he met under the imprimatur of Andrew Carnegie.[1] Written in the depths of the Depression, and published in its final period (1937), the book proved a popular tonic to what must have been the gloomy national mood regarding wealth and opportunity.

 Think and Grow Rich launched both the self-help and the get-rich book genres and Hill became a pioneer of the motivational-speaker-circuit.  Hill’s book is credited as the intellectual predecessor to self-help gurus such as Dale Carnegie (How to Win Friends and Influence People) and Tony Robbins (Awaken the Giant Within) as well as get-wealthy gurus such as Dave Ramsey (The Total Money Makeover), and Robert Kiyosaki (Rich Dad, Poor Dad).

 The self-help-and-get-rich progeny of Think and Grow Rich might be reason enough for me to trash this book, as I have a severe allergic reaction to finance gurus.[2] I could not stand reading Secrets of the Millionaire Mind by T. Harv Eker for example, as, stylistically, his book oozes snake-oil, alongside some reasonable ideas.

 What else did I not like?

 A lack of doubt

 Unlike 21st Century probabilistic thinkers – Nate Silver is my paragon here – Hill does not admit any doubt in his thought process.

In fact, his “Think and Grow Rich” method requires the suspension of disbelief. He writes in the first chapter that if you doubt his wisdom, his wisdom cannot work for you.

 A friend of mine, who recently attended a Tony Robbins “Business Mastery” seminar, told me that this faith component forms a key starting point for Robbins’ classes as well.

“Look,” Robbins explained at the outset of his weekend seminar, “You can decide this is all bullshit.  And maybe it is, and maybe it isn’t. But for it to work for you at all, you have to suspend disbelief and embrace this. Otherwise you should just go home now.”  My friend stayed, and found Robbins utterly compelling.

(I probably would have walked out then. In a related news item, I skipped Catholic mass this past weekend.)

 While I find Robbins’ moxy impressive, intellectually I rebel.  I remember a lesson from my academic advisor in college about thought-systems that cannot be criticized from within, such as Marxism or Freudianism, without the critic immediately facing intellectual exile from the system – as a member of the bourgeoisie in the former example, or utterly repressed, in the latter.

 If you can’t question it, how do you test its reliability?  Intellectually, I’m more of a test-your-assumptions kind of guy.

 Questionable science

 Hill – like his self-help progeny – combines utter certainty in his methods with an early 20th-Century “scientific” style. His style reminds me – and not in a good way – of a more confident age in which “science” and “progress” promised to unlock human motivation, imagination, and self-confidence.

 Here’s a sample of Hill’s prose, in which he references his ‘research.’

 “From my research, I have concluded that the subconscious mind is the connecting link between the finite mind of man and infinite intelligence. It is the intermediary through which you may draw upon the forces of infinite intelligence. Only the subconscious mind contains the process by which mental impulses (thoughts) are modified and changed into the spiritual (energy) equivalent. It alone is the medium through which prayer (desire) may be transmitted to the source capable of answering prayer (infinite intelligence).”

 I mean, read that over again.  What can we do with this? This falls somewhere between “certain” science and mystical gobbledygook.

 As you can see from that sample, the problem is not just his early 20th Century mode of thought, but also his clunky writing. This gets tedious after a while.

 But can this book help you get rich?

 Tony Robbins would say that question is far more important than my distaste for pseudo science, unearned certitude, and semi-mystical psychological jargon.

 Getting rich is not easy. To go from not-wealthy to wealthy does not happen by accident.  Most of us find the process mysterious, the road uncertain, even our own personal agency in the process unknown.

Can we make it happen ourselves? Or is it all mostly luck?

If Hill has a method that helps, who am I to carp?

 Here’s why I suspect Hill’s book can help.

 His step by step approach, which I’ll outline below, seems to set the right mental conditions for an individual dedicated to pursuing wealth. And if you adopt the attitudes and activities that he warns against, achieving wealth is probably impossible.

 He presupposes no particular level of education, or any special leg up in the world for his readers.

Interestingly, for his particular moment in time – and our own moment in time for that matter – Hill sees no structural barriers to wealth creation. 

He admits to no insurmountable economic conditions, no vast inequality gaps, no barriers of gender, race, and class standing in the way of an individual getting ahead in the world.

While his disregard of barriers seems naïve – many people do have a much easier starting point and journey than others – the mental attitude of “no barriers” probably is the right one. Even though these barriers exist, a modern Napoleon Hill would probably urge his readers to reset their mental compass and ignore the barriers.

Said another way, few people who self-conceive as victims of a rigged game have the right starting mind-set for pursuing wealth, the way Hill recommends doing it.

 It’s all in the mind

 Interestingly, Hill specifically declines to spell out in his book what the ‘Secret’ of getting wealthy is, claiming that readers need to open their mind to an unstated, read-between-the-lines message woven throughout his chapters and anecdotes. He claims that readers should, upon finishing his book or upon re-reading it, experience a flash of intuition that will guide them in their journey to great riches.  Maybe I’m too prosaic for hidden secrets, but I found his lessons not hidden secrets at all.  They are, in fact, easy to summarize, for your benefit.

 Hill’s steps to wealth – or any other difficult-to-achieve success.

 1.      Mastery over your own mind is a key – no, the key – to success. Fears, doubts, procrastination, negativity, defeatism – all of these must be conquered.

2.      If you want to get wealthy – or achieve other difficult-to-achieve non-monetary goals – you need to set extremely specific goals: How much money you will obtain down to the precise dollar amount, by what precise date, and through what process.  Write it all down, say it out loud, commit it to memory, and post it in a place where you can see it every day.

3.      Decide, very specifically, what you are willing to sacrifice in order to achieve your goal – since nothing in life comes for free.

4.      Repeat out loud to yourself the goal from step #2 as a mantra, upon waking up in the morning, and upon going to sleep at night, and then probably in the middle of the day as well, until you lather yourself into a white-hot obsessed state of mind, focused intensely on your goal.

5.      Seek out and attract a team of experts who know more than you, or have complementary skills to you. Hill calls this team your personal ‘Master Mind,’ – a kind of board of directors willing to work with you toward your set goal. Figure out a way to compensate your Master Mind team, as nobody works for very long without some benefit.

6.      Acquire, by your own efforts and the inputs of your Master Mind team, the specialized knowledge you’ll need to succeed.

7.      When failure and setbacks thwart you – and they will – understand that failure is just an intermediate step toward ultimate achievement of your goal.

8.      Commit to a continuous program of clearheaded self-analysis and self-improvement. To lead your team most effectively you will need to adopt and embody traits that make you deserving to lead.

 I may be doubtful about some of Hill’s style, but I don’t doubt that these instructions – more fully explained in the book’s few hundred pages – would help anyone on their road to either riches, or some other large ambition.

 Can anyone get wealthy just reading Think and Grow Rich? Well, the book sold 60 million copies and something tells me that not everyone has made it. On the other hand, not everyone has committed as fully – without any lingering doubts – as Hill urges.  Including me.

 But I wrote down my own mantra. I posted it on my bulletin board. I’m saying it out loud to myself. I’m working on it.

Please see related book reviews

 Nate Silver’s The Signal and the Noise

 T. Harv Eker’s Secrets of the Millionaire Mind

 

think-and-grow-rich-napoleon-hill


[1] There’s no evidence whatsoever he interviewed any women.

[2] I spontaneously break out in hives around my chest, neck, thigh and back area if I walk too close to that section of the bookstore.

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Book Review: Going Going by Naomi Shihab Nye

Teen romance novels for girls are not exactly the bread-and-butter of Bankers Anonymous book reviews, but stick with me for a little while, I’ve got my reasons.

Going Going by San Antonio poet and novelist Naomi Shihab Nye is not your typical teen romance novel, although it does follow the arc of a sixteen year-old downtown girl, Florrie, falling for an uptown boy.

Our heroine Florrie does not shy away from political stances, nor does the novel Going Going. The political stance dominates the novel more than the romance.

Sixteen year-old Florrie asks us, the reader, one of life’s big questions: “What makes for a good city? Indeed her question is just another way of asking: “What makes for a good life?”

In real life, I live about 6 blocks away from the author of Going Going, so it turns out I know and love many of Florrie’s places too. Her protagonist bikes with arms outstretched down her favorite street, just as I have done, on that same street.

I picked up Nye’s Going Going (at San Antonio’s homegrown The Twig Book Shop) because the City of San Antonio – just like Florrie – is currently in a deep conversation with itself over “What makes for a good city?”

And Florrie has the answer, at least for her: The old mom-and-pop stores, the place-specific homegrown businesses, make for a good city. Chain businesses, by contrast, hurt the city and make life worse.

Florrie pores over old black-and-white postcards, which she collects avidly. She thrills to memories of her Lebanese immigrant grandfather, who founded the family’s Mexican restaurant. In Florrie’s statement of purpose, written for a school project, she writes about herself:

She loved Old Ladies, Elderly Men, Old Houses, Old Spoons, Old Books, Old Bowls, old Maps, Lace Curtains, Antique Bedspreads, Recipes, Remedies, Stories (but not the dumb stories about knights and battles, which did not interest her in the least), Vintage Postcards and Tintype Photographs, Doilies, Velvet Pillows, Black-and-White Movies, Rocking Chairs, and Vintage Toys, and best of all, she loved Old Buildings and Businesses run by Real People. She loved things that were Fading and Disappearing. How could she protect them in the World?

The enemy of all that she loves, Florrie writes, are “Big Business Corporations, Urban Development, and basically People with Too Many Dollar Bills.”

Florrie’s plan, which drives the story, is to organize a teenage, guerrilla-protest movement against chain stores. She enlists her family-and-friends circle in a boycott of the Wal-Marts, the Gaps, the Home Depots of San Antonio – any store not locally-owned.  She then hosts a series of rallies against chain-store corporations in the city’s historic Main Plaza, later in front of a Wal-Mart, and finally on the touristic San Antonio River Walk, with mixed success.

In the end, the teenage activist achieves some media notice and notoriety through her protest, but not necessarily lasting change in the city.

Sympathy with Florrie

The author Naomi Nye clearly has tremendous sympathy with Florrie’s aesthetic and moral view of what makes for a good city. So do I.

Florrie is right to decry the homogenization of urban life.

Ever since the 20th Century combination of automobiles and air-conditioning made vast swaths of the American Southwest newly attractive, the cities of Texas, New Mexico, Nevada and Arizona have boomed in population.

Anywhere_USA
Florrie and I don’t want this

What we’ve built – efficiently and affordably – to service these new populations are indistinguishable commercial strips filled with chain stores.  Drive down any commercial-zoned highway in these Southwest cities and you’re assaulted with the same exact signage as any other highway – because it’s lined by the same exact chain stores. Their buildings look exactly like buildings in other places, their menu and service offerings fine-tuned to repeat the menu and service offerings of Anywhere, USA.

Where is the sense of place?  Where is the sense of a local community?

You need to exit the main highways and turn onto the smaller streets to feel the interesting heterogeneity of locally-owned businesses. From these one-off buildings – with their store owners greeting you from behind the counter – neighborhoods and communities emerge.

San Antonio, TX – Florrie’s city, Nye’s city, my city – exploded upward in population in the past 50 years but imploded in terms of interesting cultural offerings. The blocks around the Alamo, to take the most high-profile and obvious example, are blighted with the same chain-owned Ripley’s fun-house and Rainforest Café offerings you can find in any place in the nation where tourists congregate in bored, hungry numbers.

As I’ve written before, I deeply admire Jane Jacobs’ view of successful cities, which is that a mix of the new and the old – even old shabby outdated buildings – help urban areas remain flexible and innovative.

Change in the last 10 years

Written 10 years ago and published in 2005, the interesting – maybe ironic – thing about reading Going Going in 2014 is that San Antonio has already changed quite a bit since then. The Mission Drive-In, identified in the novel as one of the last operating outdoor theatres, has since been converted to merely a visual – albeit attractive – simulacrum of itself. No more outdoor movies there.

Thousands of housing units have sprouted around Florrie’s neighborhood, utterly altering traffic flow and density in the near-downtown neighborhoods of San Antonio, and this looks to continue apace in the foreseeable future.

Going Going, among other things, is a love poem to San Antonio.[1] I thrilled to recognize many of Nye’s favorite places as my favorite places, from Liberty Bar to El Mirador, from San Fernando Cathedral, to the Rose Window at Mission San Jose.

She profiles real-live personages of Florrie’s neighborhood, like bow-tied Mike Casey on his bike, or movie rental Planet of the Tapes owner Angela pushing her baby, Wiley Francisco, in a stroller.[2]

The dangers of a museum mindset

Although I’m simpatico with Nye’s Florrie, I also found myself arguing quietly against a version of Florrie’s view in real-life San Antonio, which I’ve come to call the ‘museum mindset.’

Nye depicts Florrie as a zealot – albeit a sympathetic, spunky zealot – pushing the limits of the patience of her family and friends in the furtherance of her cause to save old buildings and locally-owned businesses.

Despite the fact that Florrie is only sixteen, she represents a deeply conservative[3] strain of thought.

Because she values old things and old ways and old technologies, her frame of reference naturally resists change. New developments, even beautiful or thoughtful or desperately needed ones, spark in her an instant nostalgia for a soon-to-be lost better age.

This deeply conservative attitude – the museum mindset – surrounds us in San Antonio, and has a big voice in the debate about the future of the city.

For every new development – and there are quite a few going on right now – there is an equal and opposite reaction of “Well there goes the uniqueness of my city,” “gentrification will naturally push out diversity,” “new businesses threaten residential life,” or “here come the Yuppies.”

I’m not in the real estate development business nor do I applaud every new change, but I’ve seen enough opposition-for-opposition’s-sake fights in the name of historic preservation to see the museum mindset as a threat to the city as well.

univision_building
Preservationists sued, picketed, and went to jail to keep this 1950s-style gem from demolition

Examples of the museum mindset in San Antonio today

We see it in the fight to preserve a utilitarian 1950s-style broadcast station from demolition to make way for housing.  We see it in opposition to updating a tired grocery store façade because it references a mid-century architectural style, despite the fact that the neighborhood sorely needs a better grocery store.

Five doors down from where I live, a “house-museum” somehow manages to preserve its 501c3 tax-exempt status, despite the fact that it opens to the public a mere 10 days out of the year.  Except for those ten days, the building is totally empty all year, forming a hole in the neighborhood structure. It will not even open this year.[4]

The preservationist group that owns this house has a similar empty-old-house-as-museum project in Hudson Valley, New York. The board of trustees for the preservationist group that ‘runs’ the house-museum – a lawyer for Exxon Corporation and his two sisters – ran afoul of its neighbors in Hudson New York who grew tired of their house-museum charade in the Hudson Valley,[5] but so far my neighborhood in San Antonio allows it to continue.

perry_gething_museum_house
Hudson Valley “museum house”

The building would make a lovely residential home, but for the past forty years it has been a C-grade museum instead. My best guess is this happens because of the incumbency of the museum mindset.[6]

In downtown San Antonio, this museum mindset favors preserving an old building, however decrepit, unused, or blighted, owned by the local school district, from demolition, removal, or renovation to make way for its current highest and best use.  Preservationists have successfully check-mated the neighborhood school – a leading light in a struggling inner-city urban district – into eliminating green space for its kids. In order to preserve this haunted house in the school’s backyard – and ‘haunted house’ is literally how school administrators refer to this building privately – next year the kids will have zero yard space.  Will teachers plan on encouraging jumping jacks next to desks in their classroom, or in between the cafeteria tables? I don’t know. I do know that blighted house will keep my kid indoors all next year, while bringing down property values all along its street.

So in my opinion the museum mindset, though helpful in fighting homogenization and strip malls, also hinders progress.

This debate in San Antonio will continue as the city figures out what makes for a good city, and what makes for a good life.

114_Cedar_street_san_antonio_tx
Hey kids! Want a haunted house instead of a playground?

Nye’s spunky character Florrie provides a useful answer as a starting point to the conversation, although Florrie and I would not agree on everything.

Florrie’s romance

To my pleasant surprise, Going Going does not resolve happily.  The teenage Florrie does not keep the boy and live a mythical teenage romance.  The relationship ends uneasily, with Florrie a little bit hurt, and a little bit wiser for the experience.  Kind of like a real teenage romance.

I suppose the romance reflects unease with what Florrie’s boyfriend represents.  He comes from the recognizably wealthier, sophisticated, more corporate part of town.  Despite the kissing and their bike-riding adventures together, Florrie returns ultimately to the comfort of her parents, her brother, and a humble-but-more-loyal boy from her own neighborhood.

San Antonio’s debate

In growing into its adolescence over the past 50 years[7], San Antonio lost much of its unique character, a process so traumatic to its earlier roots that I don’t blame preservationists for seeking the comfort of the familiar and the loyal.

The older areas of town will struggle with this pull to a wealthier, sophisticated, and possibly more corporate future, and the conversation will not be easy. My guide in these things, Jane Jacobs, would say we need to keep some of the old buildings, but we also need to build some new.  The best places, and a good life, consist of preserving a sense of history and place, while not stagnating or fetishizing the old ways. Resisting all change means stagnating and ultimately being left behind, and left out of the transforming process for urban landscapes.

I salute my neighbor Naomi Shihab Nye for adding to this conversation with Going Going.

going_going Please see related post Book Review of The Turtle of Oman by Naomi Shihab Nye

Please also see related post The Death and Life of Great American Cities by Jane Jacobs

Please see related post All Bankers Anonymous book reviews in one place.

 

 


[1] Another downtown San Antonio poet Jenny Browne recently penned her own love-poem to the City, in the interestingly named Garden & Gun magazine.

[2] Angela later produced her own love-poem to her neighborhood, on YouTube.

[3] Small ‘c’ conservative, obviously

[4] If you’d ever been inside this house museum you’d know this is no big loss to the public.  I’d link to their website to give you a virtual tour, but of course, they don’t have one.  That alone tells you what you need to know about their mission to serve the public.  But hey!  501c3 status!

[5] From the Wikipedia entry on the Hudson Valley house owned by the same “preservationist” group that owns the house-museum five doors down from me: “Robert Perry, a Texas lawyer and friend of the family, named the trust the Perry-Gething Foundation. Local preservationists have filed complaints against Perry with the state and the Internal Revenue Service, angry that he keeps the house closed most of the year and resides in it himself for several weeks in the spring and fall. Perry responds that when he is present, the house is open by appointment. The tax code, he says, requires only that the foundation maintain the property and says nothing about it making the museum open to the public.”

[6] And possibly, Texans are more polite to their neighbors than New Yorkers.

[7] In this analogy, the creation of Hemisfair Park in 1968 kicked off the city’s adolescence with an horrific bulldozing of an historic neighborhood, to make way for the unapproachable, awkward, sullen park it is today. Here’s hoping the H-Park group will turn this ugly duckling into a swan. The presence of immovable, unused, empty, historic buildings in the park hinders rather than helps this process.

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Book Review: Secrets of the Millionaire Mind


I’m making my way through a list of some of the most popular personal finance books,[1] and next up is The Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth, by T. Harv Eker.

Even though Eker offers some important insights, I can’t in good conscience recommend this.

First, the good parts

Eker digs in right away with the proposition that we are our own worst enemy when it comes to financial success.  If saving money eludes us, or high-interest consumer debt burdens us, we probably need to do some soul-searching about our own relationship to money.

Did we learn from our parents that money was evil? Did some childhood experience make us likely to spend money beyond our means? Do we feel deep down that we do not deserve to be wealthy?

I’m not sure this applies in every case (some of us are just flat broke and its not psychologically-rooted) but I do think money brings out the irrational in everyone.  Sometimes, money success requires us to overcome unconscious beliefs, or develop impulse-control via therapy, or to engage in Jedi-mind tricks to save money.

All of which is to say I think Eker has some important points to make about the relationship between our unconscious selves and our bank accounts.

Eker also has some interesting – totally unproven of course, but interesting[2] – things to say about how the attitudes of wealthy people differ from the attitudes of non-wealthy people. He’s not above platitudes and clichés, but as I recently wrote in another book review, many clichés turn out to be true and useful.

Finally, Eker employs a cheesy-but-probably-effective series of cognitive behavioral therapy methods to help people address their problem. He advocates matching a physical gesture to a stated intention. Something along the lines of touching your forehead and stating outloud: “I am the master of my financial destiny and I will maximize my wealth.”

Now, this is extremely easy to parody, and SNL did parody this type of thing, but if it works, then who’s laughing? I’ve got no problem with cheesy things that work.

Daily_affirmations_parody

And now, the bad parts

So that’s the good news, now for the bad news.

Eker is an insufferable jerk.  In Chapter one, page one, we get to hear that he’s a multi-millionaire. Guess what he tells us on page two?  He’s a multi-millionaire.  Page five, yup, still a multi-millionaire.  These are not the last times he mentions it either.

Also, did he mention that he offers live “Millionaire Mind Intensive Seminars” through his “Peak Potentials Training” company?  Yes, yes he did.

In fact, he mentions it multiple times in every chapter.

On the inner flap, just above the small-print copyright and publishing information, Eker spells out the terms and conditions of a “Free” seminar available to purchasers of the book, a $2,500 value![3] And he mentions the “free seminar offer” on the back cover of the book.  As much as Eker offers some useful platitudes, he loses me with the obvious up-sell.

Reading the book I can too easily picture Eker pacing a big ballroom, microphone in hand, spewing his carnival barker patter.

“I make millions of dollars through these 7 secrets to success, and you too can make millions of dollars if you learn these secrets.  But in this $2,500 weekend class I can only tell you the first three secrets. So…

Once you sign up for my 1-week “Intermediate Class” for the low low price of $15,000 then I’ll reveal the next four secrets.

But of course that will only get you so far, so I highly recommend my further Expert class on the 10 Practices of Highly Compensated people, which will only cost you $1,500 per month.”  You get the idea.

This book is really a long-form text-based infomercial for his in-person seminars.[4]

But hey, it’s a free country, I guess.

More than anything I see his patter about his multi-millionaire secrets to wealth as a kind of dog-whistling for credulous clients.  If you’re the kind of person who can stomach his braggadocio and platitudes, you’re probably the perfect candidate to shell out healthy sums for his in-person, upsold, seminars.

Also, can I interest you in some time-shares?

Please see related post All Bankers Anonymous book reviews in one place.

secrets_of_the_millionaire_mind
Dog-whistling for credulous clients for in-person seminars

[1] Using this extremely flawed list, which pops to the top of the Google search for “Best Personal Finance Books of all Time.”

[2] Par for the course with this genre, but there’s no data in this book, only anecdotes.  My wife would hate it.

[3] Or something.

[4] I gather from other reviews of the book online that this ‘free’ offer requires you to provide your email address and place a $100 deposit by credit card to reserve your spot.  So, yeah.

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Book Review: Why Smart People Make Big Money Mistakes


One of the challenges of trying to teach and write about finance is figuring out the right balance between factual/rational information and psychological/irrational awareness.

We can all “know” the right ten things to do with our money, or we can all learn five correct financial math techniques as much as the next person – but money topics are so darned psychological that the math and rules and facts only get us so far.

Without some kind of intervention, or a very unusual upbringing, we’ll probably just continue our irrational path and unhelpful decisions anyway.

Gary Belsky – a finance writer – and Thomas Gilovich – a psychology professor – teamed up to write the translational text Why Smart People Make Big Money Mistakes and How To Correct Them to teach us the most common psychological or irrational choices we all make about money, all the time.  I say translational because this book is really a popularization, or translation, of behavioral economics, pioneered by Nobel Prize-winning Daniel Kahneman and the late Amos Tvorsky.

Quick aside on the history of economics: Traditional mainstream economics posits that people are rational, that we make self-interested utility-maximizing decisions, and we can understand society and the allocation of resources based on that beginning assumption.

Now, if this assumption of mainstream economics were actually true in all cases, the task of teaching personal finance would be made so much easier.  We could just tell people:

1. Here are the facts

2. Here is your self-interest

3. Now go forth and become a rational, wealthy, person.

Since most people are not wealthy, I’m going to go ahead and make the bold statement that the assumption of rational self-interest needs some tweaking.[1]  And Kahneman and Tvorsky pioneered some of the most impressive tweaking in 1960s, which pioneering work became known as behavioral economics.  It turns out most of us inject quite a bit of irrationality into our personal finance decisions, which partly explains why so few people are wealthy, or as wealthy as they ought to be.

Belsky and Gilovich’s excellent book translates this research into memorable anecdotes and examples and applies it to some of the most common financial mistakes we all make.  Their theory, which seems extremely plausible to me, is that understanding the irrational choices we often make, and why we make them, will help us make better choices in the future.

Ubiquity of Overconfidence

Most of us tend to overestimate what we know and underestimate our ignorance of what we don’t know.  I appreciated Belsky and Gilovich’s following test:

Name a high and low range for

a) The diameter of the moon in miles and

b) The weight of an empty Boeing 747 in pounds.  Set the range so that you are 90% confident that the correct answer will be within your high and low range.

This seemed pretty easy to me.  And I recommend you think of your range before checking the answer in the footnote.[2]  Just do it now, I’ll wait….

Ok.

So I did this and I got it wrong.  Maybe you did too.  Belsky and Gilovich say most people do get it wrong, even though most people could set an extraordinarily wide range and get it “right.” Their point is that for topics about which we’re really not experts, we tend to be overconfident with our answers.  The idea here, applied to investing, is that we all tend to think we know more than we actually know.

In a related story, have you noticed a lot of complete amateurs who buy individual stocks?  (Yes, I’m looking at you.  And me.)

How about my own related story? Back in the Spring of 2001 I was selling bonds for Goldman Sachs and I was quite a sophistical investor, let me tell you.  I bought and sold securities for a living, had minute-by-minute access to financial data, and smart finance professionals all around me with whom I constantly exchanged investment ideas.

I had my eye on an amazing stock for an amazingly profitable company and I had some pretty good information about it. I spent quite a bit of time on my Bloomberg terminal (all that Street research at my fingertips!) researching their strongest points. Although they ran a traditional oil and gas pipeline network business, they were known to employ some of the smartest guys on the planet, including an internal emerging markets bond hedge fund that was a client of mine. I knew these guys personally. After visiting my clients at this company in Houston, I came away so impressed that I vowed to myself I would invest my next big bonus in their stock.

Fortunately for me, Enron imploded in the Fall of 2001 before I got paid.

The lesson:  I know nothing.[3]

And neither do you!  This is good to remember.

enron_logo
My leading investment idea of 2001!

Anchoring Effect of Numbers

We are all extremely susceptible to the power of suggestion, when it comes to finance, through the ‘anchoring effect’ of numbers.

When the rug salesman shows us a fine carpet and names his offering price, we naturally know that it’s a bit high.  We adjust some percent discount that seems like a ‘tough’ negotiating position, say 40% less. We then eventually find a middle ground with the salesman around 80% of the original offered price.  We feel clever for driving that hard bargain to produce 20% savings.  The rug salesman feels happy because, in fact, he started the price at 10 times above his bottom line price.  What did we know?

When my student in the Personal Finance class I teach this semester mentions that Best Buy stocks are suddenly down 27% on the day, and asks me if he should buy some for a trade, as happened to me a few weeks ago, all I can think is I should tell him about:

1. The ubiquity of overconfidence, combined with

2. The anchoring effect of the previous days’ Best Buy price.

In reality, he has no idea whether Best Buy is fairly valued today, yesterday, or three weeks ago.  Nor do I.  But it seems cheap.  So did the rug.

Money Illusion – Nominal v. Real

This one happens all the time.  Belsky and Gilovich provide a nice example, which I’ve paraphrased below.

Three different homeowners experience price changes on their homes purchased for $200,000 in different ways, in the year before they sell it.

For the first homeowner, Peter, one year of intense inflation raises the price of all assets in his country, by 25%.  He manages to sell his house at an appreciated price of 23%, netting him $246,000 at the end of the year.

For the second homeowner, Paul, at the end of a year of unchanged prices (no inflation) in the economy he sells his house for the same amount, and nets $200,000.

Mary, the third homeowner, experiences a rapid deflation of prices by 25% in the economy, and sells her house for a 23% loss, netting $154,000.

Who is better and worse off?

Now you may be clever enough to know that Mary is the best-off of the three, as the purchasing power of her $154,000 is higher than the purchasing power of Peter’s $246,000.

On the other hand, in the real world, it’s extremely challenging for all of us to remain immune to the illusions of real versus nominal dollar values.

Mental Accounting

As psychologically complicated beings, we create different ‘mental buckets’ for certain pockets of money.

This pushes us off the rational financial path in a variety of dramatic ways.

Most of us have a difficult time saving money because we experience the removal of that money from our ‘spending bucket’ as a painful loss.

When we can manage to set up an automatic payroll deduction into a savings account or 401K retirement plan, by contrast, we never have the chance to feel that loss.  The act of accumulating savings goes from being extremely hard to do to being simple and unnoticed, a mental jedi-mind trick that for many is the key to having a savings plan.

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Jedi Mind tricks regarding Imperial Credits

Loss Aversion

Belsky and Gilovich point out that we tend to experience the pain of financial losses more dramatically than the pleasure of financial gains.  This inequality of reaction leads us to be more ‘loss-averse’ in our investment choices than we should otherwise be, in a purely rational world.  In other words, if we were not plagued by our loss aversion, many more of us would have a much greater portion of our investment portfolios in risky assets – such as stocks – rather than non-risky assets – such as bonds – as I’ve argued, from a purely rational standpoint, before.

It doesn’t make sense for your wallet or your rational self, but we act with our irrational instincts much of the time.

Belsky and Gilovich present a great deal more examples of ways in which we all fall prey to illogical, irrational, thoughts and actions when it comes to finance.  I highly recommend their excellent translation of Nobel Prize-winning research into actionable steps for improving our personal financial situations.

 

Please see related post All Bankers Anonymous book reviews in one place

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[1] No, nobody said anything about twerking.  Now get your irrational mind out of the gutter.

[2] Moon diameter: 2,160 miles. I guessed a range of 4,000 to 40,000 miles. Oof.  Empty Boeing 747 weight: 390,000 pounds. I guessed a range of 10 to 100 tons, or 20,000 to 200,000 pounds.  Oof again.  What did you guess?

[3] Or as Ygrette would say: “You know nothing, Jon Snow.”

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Book Review: The Way To Wealth by Benjamin Franklin


My father once said to me “One of the interesting things about getting older is realizing that the clichés, prejudices, and popular wisdoms that we rejected as young, educated, independent thinkers turn out, in the end, to be true.”

I love this idea, in part, for its double-contrarianism.

The Way to Wealth by Benjamin Franklin reminds me of my father’s world-view, formed as a Depression-era child, delivered in Franklin’s 18th Century style.

Also, these clichés are true.

We know “Early to bed, early to rise, makes a man healthy, wealthy, and wise,” and a few others, but I had not heard most of them.

The Way to Wealth originally formed the preface to Franklin’s Poor Richard’s Almanack.  The book’s conceit is that Franklin’s alter-ego Richard overhears an old man (Father Abraham) quoting his favorite parts from the Almanack to a group gathered together before an auction.  As such, the farmer gives a kind of fast-and-furious greatest hits of aphorisms, tied together by the themes of Industry, Care, Frugality, and Knowledge.

Some of my favorites from this book, which I hadn’t already heard:

On complaints about government taxes:

Friends, the taxes are, indeed, very heavy; and, if those laid on by the government were the only ones we had to pay, we might more easily discharge them; but we have many others, and much more grievous to some of us.  We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly; and from these taxes the commissioners cannot ease or deliver us, by allowing an abatement.

On the urge to buy things that seem cheap, on sale, or a bargain:

Here you are all got together at this sale of fineries and knickknacks.  You call them goods; but, if you do not take care, they will prove evils to some of you.  You expect they will be sold cheap, and, perhaps, they may [be bought] for less than they cost; but, if you have no occasion for them, they must be dear to you…He means, that perhaps the cheapest is apparent only, and not real; or the bargain, by straightening thee in thy business, may do thee more harm than good.  For in another place he says ‘Many have been ruined by buying good penny worths.’

On the relativistic nature of time, if you owe money at the end of the month:

When you have got your bargain, you may, perhaps, think a little of payment; but, as Poor Richard says, ‘Creditors have better memories than debtors; creditors are superstitious sect, great observers of set days and times.’  The day comes round before you are aware, and the demand is made before you are able to satisfy it; or, if you bear your debt in mind, the term which at first seemed so long, will, as it lessens, appear extremely short: Time will seem to have added wings to his heels as well as his shoulders. ‘Those have a short lent, who owe money to be paid at Easter.’

The little book’s scant thirty pages could, with smaller type and larger sheets, condense to about five pages.  So you’re looking at about 10 minutes of dense wisdom from a founding father of the United States.

Please also see related post All Bankers Anonymous book reviews in one place.

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It’s all about the Benjamins

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Book Review: The Money Mentor by Tad Crawford


I didn’t expect to like The Money Mentor: A Tale of Financial Freedom by Tad Crawford.  Crawford wrote this modern-day fable aimed most at people who struggle with high-interest debt.  The Money Mentor in that sense is a modern-day version of George Clason’s The Richest Man in Babylon.

We meet the narrator/protagonist Iris, a 20-something wannabe dancer in the big city, with multiple body piercings, dead-end jobs, and out-of-control credit card debt.  She’s not exactly the profile of someone from whom I’m looking to learn about finance, even if I am – admittedly – picturing Rooney Mara in the starring role.

In the first chapter, Iris receives a very stern, one-way talking-to, by her tone-deaf dentist about the evils of credit card debt.  The author seems to have set up the dentist as a foil to contrast with Iris’ eventual money mentor.

The dentist – I’m picturing Steve Martin in this hyper-talkative, annoying role –  represents both preachy personal finance books, as well as any smarmy adult who does not take the time to understand the particular challenges of the heavily indebted.

Rooney_mara
Would you learn finance from this person?

Finally, we meet the Money Mentor, Saidah, as the we’ve-seen-this-cliché-before wise African-American woman.  Believe me when I say I was skeptical of this Oprah-meets-Sonia-Sotomayor-fairy-godmother character.

The weird thing is this: I really enjoyed the book.

Iris/Rooney Mara doesn’t live like me, but Crawford writes well enough to create a sympathetic character.

Ninety-five percent of us have probably felt like her at some point – there’s not enough at the end of the month to pay all of our bills.  We don’t know who to ask for help.  Maybe we should just give in to the feeling that it can’t get any better and sink further into the debt?  Is it all just too hard to get ahead so why bother?

One-half of all Americans do carry a credit card balance month to month.

Most of us do need a wise money mentor in our life, and typically the adults in our life either do not have the answers, or do not have the empathy to show us where to find them.

Saidah understands because, as we learn, she once faced heavy debts herself.  Saidah listens, and Saidah suggests solutions.  When Iris inevitably ignores her suggestions, Saidah repeats herself patiently.

I expected Iris to meet Saidah and then, in the typical arc of redemption stories, suddenly get her act together and pay off her debts.

But Crawford is a better writer than that.  He depicts a fuller story of one step forward, two steps back for Iris.  Things get worse before they get better.  Like all of us, Iris vacillates between self-pity and self-confidence, good decisions and bad, willful blindness and occasional insight, eagerness to see her mentor and avoidance of her mentor from shame at her poor choices.

I knew The Money Mentor was a keeper when I got to the chapter when Iris watches It’s a Wonderful Life, and she’s inspired by the Christmas classic to take an important step forward in her journey to solvency.  Careful readers of Bankers Anonymous will recognize that the movie similarly touched me.

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In Iris’ case, the realization that she needed help from others led her to try Debtors Anonymous, a 12-step support group for people ready to make a change in their relationship to debt.

Money problems stem from a cash-flow deficit and our own psychological relationship with money.  Solving the problem of high interest debt requires a combination of psychological change and cash flow management.

Many finance books I have read risk erring on the side of the dentist – a tone-deaf, one-way lecture on the right way to be.

But who wants to hear that?  Most of us do not learn that way.

Crawford’s fictional fable allows space for the psychological, the irrational, and the personal in addressing our finances.  I really liked this one.

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Please see related post Become a Money-saving Jedi.

Please see related post Book Review of George Clason’s The Richest Man in Babylon

Please see related post All Bankers Anonymous books reviewed, in one place

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