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October 28, 2009


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Re risk-taking/optimism being more likely among the wealthy than the well-off:

It's kind of like saying that those who win the lottery are more likely to buy lottery tickets.

The situation actually might be that some take risks and get wealthy, but many others take those same risks and....uh....slide down to the paycheck-to-paycheck group.


That's actually a great point.

It shows correlation but it doesn't necessarily show causation.

Entreprenuers tend to be the most optimistic group on the planet. Their optimism causes them to "go for it" when others might hold back. As a result some of them hit the jackpot. But we know that within 5 years 9 out of 10 business will fail. And by going for it many of them end up mortgaging every personal asset they have, borrowing from friends and family, forgo career advancement to "follow the dream." And I am not saying people shouldn't. But looking only at those who succeeded and determining what characteristics they have in common does seem to show those characteristics are important to succeed but it doesn't show if follow those characterstics is likely to improve your situation. It's possible that most of the wealthy come from the financially comfortable but 1 out of 10 make it to the wealthy (27% versus 3% seems about right), while the other 9 out of 10 that failed, ruined themselves financially (as you said, slide back into the pay check to pay check group).

In fact there was a very recent study (July 2009) that showed among the entrepreneurs who had a business that was making money (not necessarily wildly successful but they were not going broke), among those optimism was negatively correlated with success.

Now this group of people is a wildly optimistic group to begin with so it doesn't show that optimism is bad, but it does show that too much optimism reduces your success. Interestly in the study it was found that among entrepreneurs who had previously had a successful venture and were doing a second or third venture optimism was even more negatively correlated. Namely, once you had had success, your optimism tended to be even more blinding to you and caused you to perform even worse than people with the same level of optimism who had not yet succeeded.

Optimism as a term is too broad for me to use it as a quality to seek or not. Definitionally optimism means you expect things to turn out for the best. This is really kind of an irrational way to view things. You should expect things to turn out how they are most likely to turn out, not necessarily the best. You should look for opportunities to improve your chance for success and you should seize on them. You should weight risk/reward and if there are good chances for success without much chance of coming into ruin you should move forward with the risk although with some caution and plans for what to do if things go unexpectedly bad. But to just say, well odds are not great but I am exceptional so I am going to jump. That's not optimism that I can believe in. That's irrational. But I have seen many entrepreneurs who behave that way, and invariably some of them will get rich doing it and what characteristic will they have? Irrational optimism. And there is nothing positive about it. When you take a half court shot and it goes in, that still doesn't make it a good shot.

Apex, I am both amazed and pleased to see that you realize this. You have no idea how many entrepreneurs I've come across that don't even consider that their optimism is not only their source of strength, but is also their main weakness.

While incredibly effective, it's actually not even enough to be motivated and grounded at the same time. More important than anything else, I believe the true correlation to success is knowledge and experience. It isn't enough to have balls to charge in like a Viking Berserker. Once there, we must also possess superior battlefield knowledge and skills if we are to win the day.

Recognizing the strengths and especially the weaknesses within ourselves is a fundamentally important step towards becoming that superior warlord er I mean business man.


"have the balls to charge in like a Viking Berserker" - HA HA, I love the imagery.

So as someone who seems to have had some experience dealing with this, I would ask you if there is any hope to "tame" the Viking Berserker. I have had association with a few of these berserkers and worked along side one for a while. The irrationality and the constant changing directions, constantly believing more money was to be had in the next great idea rather than continuing to grow the business model that was slowly working. It would drive me crazy and I would think to myself what a terrible business person this was but then I would catch myself and say, no he actually has great business skills if he could just be have a little executive oversight to prevent him from harming himself.

The problem in my experience is these types of individuals tend to be so full of themselves and so convinced everything that spews from their brains is pure gold that they refuse to have their business freedom limited in any fashion. Or atleast that is what it seems like when I see it.

Any ideas how you can channel the positive aspects of these individuals and protect them from their negative aspects?

Well, if you are amused by it, then let's run with the Berserker imagery, shall we?

Historically, Viking Berskers were highly effective in medieval combat. Why was this?

While it's true Vikings were known have to been armed with a large variety of weaponry, the one the opponents feared was the humble axe. But thanks to Nordic genes, these Norsemen were also stereotypically larger than their Anglo-Saxon counter-parts, allowing them to wield larger axes.

The cocktail was potent to say the least. An enraged giant with an equally menacing axe was just the thing to smash through the main form of defense from the English: The shield wall.

The shield wall, where men locked their shields to prevent their opponents from out-maneuvering and out-flanking them and strike their vulnerable backsides, have proven successful in many western battles. And normally, this should have been the case as well.

Unfortunately, the determined English defenders were ultimately inexperienced farmers and herders, not professional soldiers.

In fact, it was quite necessary for the Norse to fight in a berserked fashion. The weapon of choice, the axe, simply was not designed for proper field combat. Quite the contrary, it was a wood-cutter's tool. Each swing was large and wide, leaving a lot of gaps in their defenses.

As such, the Vikings HAD to be wild and extremely aggressive. It was necessary in order to cover up their weaknesses. Fortunately for them, the ability for the axes to deliver crippling blows capable of smashing through English shield walls provided the vital victory they needed.

I'm sorry, I'm getting carried away. But the point here is, it isn't always good enough to lock up a defend. However, it's also not always good to just charge in wild (because in a different circumstance, the Vikings could have been easily defeated).

But the point that I am trying to make is that we must posses the ability to analyze the battlefield er business situation. Know what we're up against and its strengths and weakenesses, as well as take stock of our own strengths and weaknesses. And then, be able to know how we should proceed with what action and when.

As Sun Tzu once said, "Know yourself and know the enemy, and you will win a thousand battles." Er... and business.

Sorry, let me try this one last time: Knowing when to charge in and when to up lock & defend is the key. That way, you don't charge in a reckless, suicidal fashion (the negative aspect of being the type that charges in), and the same goes for locking and defending at the wrong time as well.

Hope that rambling helped.

Sorry, just want to clarify this tidbit and I'll leave it alone:

That's why we frequent places like this, isn't it? Because we are seeking ways to improve our skills to help us win our own financial battles.

So, that's the trick: Learn more, know more, be able to do more.

"2% say money causes headaches in their lives"

I've got to admit I'm totally shocked by this stat. We're constantly fed that you need millions to retire, hundreds of thousands to send our kids to school. Heck, the "$240K of investable assets" barely covers the cost of one kid (or so we are told) or a third of an "acceptable" home in a metro area. I just assumed half the people in this group would be stressing about money.

Off topic perhaps:
We have no debt, but for our mortgage. We both pay our credit cards off each month. Is there any value to not paying off the balance 100% every month in order to improve our credit score, which is above 800? Just asking.

Some great comments here!

Average (I guess we could use "mid-career" as a proxy) "investable assets" of $240k: would this include home equity? I guess it does, since a previous blog post spelled out that $500k net worth makes you wealthy (mid-career).

These posts about Wealthy vs Financially Comfortable have made me realize two things.

First, based on the aspects listed, my husband and I seem to fit solidly into the Financially Comfortable category since we are 26 years old and have $120,000 net worth including our house (or about $80,000 without it).

Second, our only hope to enter the Wealthy category is time and compounding interest since our combined gross income is only $78,000, we live on $36,000-40,000 a year, he is definitely not an optimist, and we only have "risk" in the sense that we own stocks and mutual funds...not very risky stocks and mutual funds either; stocks with high dividends and target date mutual funds.

Now I'm depressed. I thought we were doing great, but we just seem to be doing so-so and it's mostly because of our own mindsets...dang. That's a downer...

No, there is no real extra value added to your credit score by carrying a balance. Your credit score is really boosted by using less than 25% of your available credit combined and a certain percentage per credit card (I forget what that % is, was definitely less than 35%...). If your score is already above 800, you will already be able to get the best available rates on loans and whatnot, so why waste the money on finance charges you don't need?


being only 26 and being in the position you're in, I'd say both "well off" and "wealthy" are within reach. It's just a matter of how important it is to you. If you cut your living expenses to, say, $32k/year, saved the difference, and got decent raises at work, by the time you're 35 you could be in the "wealthy" category. Would it be worth it to cut those expenses?

You don't need to have every attribute given in the list to become wealthy. You just need to have enough of them and be willing to make a few tradeoffs. But then, being "financially comfortable" might be just fine for you.

@Strick. It's true that the AVERAGE person in the "financially comfortable" category has $240k in investable assets. However, she also notes that that number rises with age. So, I think it's safe to say, people in the "financially comfortable" category in their 50s and 60s probably have more like 500K, and people in their 30s and 40s more like 150-200K.

It gives me the comfort to read the word financially comfortable. I truly believe that for most of the citizens in the world, the word financially comfortable would suffice rather than attaining status like becoming a billionaire or a millionaire at that. Being financially comfortable is more of creating a personal financial world or universe where the applications of financial cycles could be more attainable at the same time easing and comfortable. Most of the times attaining a higher status other than financially comfortable could sometimes be stressing and self-depriving of the very essence of what wealth is all about. The concept of saying that wealth is he who enjoys it rather than he who has it, is more akin to being financially comfortable. This does not mean however that we should neglect and make a taboo to all the golden rules in attaining wealth and prosperity in life. What I advocate, however is to define the kind of financial situations where all the steps to financial well-being are not neglected but suitable to your unique way of living your personal life. Take note that being financially comfortable goes a long way and it goes with many other things like harmonious relationships, good health and peace of mind. This is the reason why the wealthy and the super rich are inclined to be indeed philanthropist since they realize that wealth without the benefit of the society is doomed. As great and wealthy people would advocate that their principles in life is to earn all you can, save all you can, invest all you can and give all you can. Even one of the Presidents of the U.S.A. would preach that no one ever became great by receiving but by giving. These are some salient features on how to become financially comfortable, the way it will suit yourself personally will only be determined by you alone. Wealth or financially comfortable could mean having the ability to meet all your financial obligations promptly, the power to spend your money to meet your needs and the comfort of defining your luxury in life - whether it is having a vacation, tour or just resting a month or two to enjoy the graces of life. Being financially comfortable may not necessarily be having a seven digit asset or net worth, it can be a bit lower but at the same time not impairing your relationships especially with your family or friends. After all even Mr. Benjamin Franklin would say that the only purpose in life is to enjoy it and it is our noble right to seek to enjoy it if we have not attained it yet.

@Apex. Good point.

Chatzky actually points out the being too optimistic or too happy does not produce good results. Being too optimistic can make people unrealistic. Being too happy can make people complacent. So she says something to the effect that you probably want to be around an 8 (on a scale of 1 to 10) on the happiness and optimism scales.

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