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Most lotto winners end up ruins.
This is also true for a large part of professional athletesespecially in basketball (60%) and football (78%).
Ruined, that does not necessarily mean that they are on the street.
For the most part, they have returned to a common situation, that of the “soft stomach” of the population… after cashing in millions.
Even more surprisingly, this “return to normal” often happens at the end of their career.
How can they get there?
They suffered from House Money Effect »
the House Money Effect, is the fact of earning a sum of money in a quick and easy way, generally unrelated to our personal merits. This phenomenon leads us to do not manage this money as if it were ours.
Let’s take an example: you go to the casino.
You sit at any table, and after 5 minutes you quintuple your bet.
Easy, fast money that falls from the sky. And what’s more, you don’t owe it to your talent but to the chance.
Say you came with $1,000, and now you have $5,000.
Do you think you are going to spend a “normal” evening betting “as usual” in this casino?
the House Money Effectobserved for a long time and documented scientifically since the 90s, will poison all your decisions.
Clearly, as these €4,000 rab literally fell on you, unconsciously you act as if they were not not really yours.
As if it were the money of the casino, and therefore, that it was less severe to lose it.
Conclusion: you will take more risks with this money than with your starting €1,000.
While money is completely fungible: nothing differentiate your €1,000 from those €4,000 won by chance.
But for you, there is a part of value in that €5,000 (the €1,000) and a part that can be risked more freely (the €4,000).
Many studies brilliantly describe this phenomenon. It is in particular Robert Thaler, Nobel Prize in Economics 2017, who put his finger on this phenomenon at the end of the 20th century.th century.
On the other hand, we do not talk enough about deep patterns that underlie this behavior.
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The value of money, the value of labor
If you have had the same education as me, you know that money has a value.
And this value is closely linked to the value of work.
Also, “money = result of work”, in the unconscious of many people.
Money is not free.
And at the same time, “casino win = free money”.
Now, “free money = less value” than the money you paid for with your sweat and time.
This is how I sum up the “equation” of the House Money Effect.
Money doesn’t grow on treesclear.
And if it falls on us like it would fall out of a tree… it’s not really money.
If I’m talking about this, it’s because the situation happens very frequently on the stock market.
People win a lot of money all at once, almost “too” easily… so they take part of their winnings (which is positive, it is better to know how to take your winnings)…
… then they invest it anyhow !
On values that seem solid to them – without doing any research.
On companies that are in complicated sectors – so it “must” have value.
In short, instead of relying on this fine performance and taking advantage of a “lucky stroke” to continue building their wealth…they are squandering their money because they won it too quickly.
They behave like children.
Bitcoin millionaires and dumbbells
This phenomenon is extremely widespread.
I enjoin you not to be intoxicated by too rapid gains: rise to the height of this random smile.
Don’t make hasty decisions.
Think with the same degree of caution and moderation as if you had won nothing.
Of course, we can take some risks with the money we earn. Sometimes it pays.
But you should not consider that easily earned money is worth less.
For if you limit “valuable” money to the money you earn by working, you will never be rich : the days are only 24 hours long and salaries are capped.
It is therefore not the arduousness of the work nor the time it takes to earn it that makes the value of money.
Don’t put a symbolic charge on it: money is only a means, and its distribution will never be fair on the merits of each.
If you earn money “easy” thanks to the stock market, you deserve it, period.
So behave with that money as someone who deserves it.
Don’t become one of those uneducated and expensive bitcoin millionaires… squander their fortunes in useless gadgets, in masterpieces of the most abstruse contemporary art, in eccentricities and other aberrations.
Build your wealth, but know how to share things.
I urge you to follow the dumbbell strategyadvocated by Nassim Taleb.
On a dumbbell, the weight is distributed at both ends.
Do the same: split your investments at both ends (but not of equal size, unlike a common dumbbell).
On the one hand, total caution, on the other, assumed risk-taking.
This is the example of author-civil servants, like Stendhal or Claudel: their civil servant status guarantees them the securitywhile their literary activity is much more random… but can propel to fame and fortune.
The lesson is simple: don’t put all your eggs in one basket.
For example: invest 80% of your money in solid stocks that shape the future, and put the remaining 20% in more volatile investments.
Thereby, you don’t risk losing everythingbut conversely, you have the opportunity to earn a lot of money with this risky investment.
It’s a story of ” containment »: regardless of the circumstances, you have to stay on course and compartmentalize things.
Who is Mark Schneider?
Marc Schneider is the founder ofArgo Editions, a financial publishing and investment research firm. Its free newsletter brings together more than 60,000 readers each week.
Ancient Risk ManagerMarc helps his readers understand the inner workings of investing in the stock market and cryptocurrencies to take charge of their financial future.
Its newsletter deals with various subjects: new technologies, cryptocurrencies, investment psychology or even geopolitics… with a common denominator: understand the world around us to better manage your finances.