General Governance Interviews Markets
How your mental biases can stop you from becoming rich: ET Wealth Article
May 14, 2018

As a child, coming from a middle class family, I frequently used to wonder what it took to be rich. It was not until I read Predictably Irrational by Dan Ariely and Secrets of Millionaire Mind by T. Harv that I discovered how becoming rich was more about one’s mindset than anything else.

We often imbibe certain principles from our families, social circles, etc. which unknowingly deter us from developing the mindset needed for wealth creation. Find out if any of these cognitive biases are preventing you from getting rich.

Do you strive to make your money work for you?

I saw my family members work hard, sometimes more than 14 hours a day. However, it was surprising to see the same dedication missing when it came to managing their hard-earned money. Most people, including accomplished professionals, do not focus on making their money work at all. Unless you approach investing your hard-earned money with the same passion and dedication with which you earn it, you will not be financially independent.

One of the ways I do this is by asking myself: ‘Is this the best investment I can make with my money?’ This simple question will drive you towards the most effective investment option. Remember, you can only work 8-12 hours a day, but your investments work round the clock. Warren Buffett has put it aptly: “If you don’t find a way to make money while you sleep, you will have to work till you die.”

Investing is about risk and reward, not just risk

When most people think about investing, they think of the risks involved and the possibility of losing money. Generating returns is an afterthought. While there is nothing wrong with assessing investment risks, there is a difference between risk consciousness and risk averseness. Risk consciousness is about minimising the risk for a given reward. Risk averseness is just the fear of losing money.

In wealth creation or investing, the interplay of risk and reward is very important. People tend to go back to being risk averse, if they lose money in a particular investment. Their subsequent actions are defined by their previous experience. But whether you play poker or invest, when you lose money, it doesn’t necessarily mean that you made a bad bet or investment. Whatever the asset class you choose—equities, real estate, gold—be cognizant of why you are investing in it. Look at what is the upside—how much you can earn, with how much certainty and how you can minimise the uncertainty. This is called taking calculated risks. As Buffet says, “Real risk comes from not knowing what you are doing.”

Do you focus on increasing earnings, or just cutting costs?

Our Indian culture teaches us to control our expenses. It’s a great thing. But the moment we are faced with a sudden expense, our first reaction is to cut back on spendings. While this might help temporarily, it is not a sustainable solution. Why not look at increasing the family income? Find something that you are good at and see if you can monetise it.

Something that you can do in your spare time for which people are willing to pay. More than the end result, it is such a mindset that needs to be cultivated. Most successful people build multiple sustainable income streams, whereas the others are largely dependent on income from salary, and look at improving their savings by curtailing their expenses.

Do you focus on saving for goals or financial independence?

Human beings have a commendable ability to work single-mindedly and tirelessly to realise specific goals. Our savings mentality is events based and the aim is not financial independence by a certain age—which will also take care of the most important events in one’s life be it children’s education, marriage, etc. When there are emotional aspects playing in financial decisions, the decisions will always be sub-optimal .

A marriage 20 years down the line is a goal that may be met by putting in money every month into a savings kitty but, if the goal is financial independence, say, by the age of 45, then this cannot be achieved by a linear growth in income and savings. You will have to find alternative ways, including upgrading yourself to earn more, finding better investment opportunities and, most importantly, orienting yourself to wealth creation and not just wealth preservation. As Michelangelo said: “The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark.”



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Vikas Khemani

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