{"id":59771,"date":"2022-02-10T19:34:25","date_gmt":"2022-02-10T23:34:25","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=59771"},"modified":"2022-02-18T12:05:59","modified_gmt":"2022-02-18T16:05:59","slug":"personal-finance-stories","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/personal-finance-stories\/","title":{"rendered":"How Personal Finance Stories May Be Influencing You"},"content":{"rendered":"\n<p>Do you allow personal finance stories to change how you use your money? Do finance stories scare you away from making certain decisions or inspire you to invest in certain things?<\/p>\n\n\n\n<p>According to Morgan Housel, the author of <em>The Psychology of Money, <\/em>falling for <a href=\"https:\/\/www.shortform.com\/blog\/achieving-financial-success\/\">financial success<\/a> stories can cause you to make poor financial decisions. Listening to the personal finance stories of others can influence you to risk your financial health based on hope, or even make you think that you have more control than you actually do.<\/p>\n\n\n\n<p>Here&#8217;s why you should be careful what stories you believe about money. <\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-be-careful-what-stories-you-believe-about-money\"><strong>Be Careful What Stories You Believe About Money<\/strong><\/h2>\n\n\n\n<p>Maintaining your financial success isn\u2019t just about understanding what information matters to you; it&#8217;s also about understanding the power of information in general. Morgan Housel posits that personal finance stories drive our decisions more effectively than statistics<strong>\u2014<\/strong>so if you fall for an incorrect story, you&#8217;re prone to making poor financial decisions<strong>.<\/strong> Therefore, Housel warns, you must <strong>be careful what stories you believe about money<\/strong>.&nbsp;<\/p>\n\n\n\n<p>To illustrate how stories affect our financial decisions more than objective factors\u2014like our ability to grow wealth\u2014Housel points to how the United States\u2019 economic situation differed between 2007 and 2009. Many of the seemingly objective factors were better in 2009 than in 2007: We had and were capable of more thanks to things like <a href=\"https:\/\/www.shortform.com\/blog\/the-advancement-of-technology\/\">advancements in technology<\/a>. But 2009&#8217;s economy was far worse than 2007&#8217;s because, according to Housel, we were reacting to a different story. In 2007, we believed that housing prices would keep rising; by 2009, we were experiencing the fallout that occurred when people stopped believing that story.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>How Stories Affect the Objective Factors That Matter<\/strong><br><br>Housel uses the same story about the difference between the United States\u2019 economic situation in 2009 and 2007 to begin <a href=\"https:\/\/www.collaborativefund.com\/uploads\/The%20Greatest%20Story%20Ever%20Told%20--Collaborative%20Fund.pdf\">a 2017 report that describes the power stories have to affect our financial decisions<\/a>. Many sections of the report are practically identical to sections of his book. However, Housel makes one key claim in this report that he doesn\u2019t mention in his book: He argues that every economic asset, like a career or a company\u2019s value, depends on both its actual ability to deliver value and how much people <em>believe<\/em> in that ability\u2014and that the second factor influences the first. For example, he notes, people believe that Amazon will drive technological change, so top engineers flock to Amazon\u2014and so, Amazon has the talent it needs to drive technological change. In other words, stories may affect our financial decisions more than objective factors, but the stories can change those objective factors, too.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-how-stories-influence-your-decisions\"><strong>How Stories Influence Your Decisions<\/strong><\/h3>\n\n\n\n<p>How, exactly, does falling for an incorrect story worsen your financial decisions? Housel posits that there are two main reasons.&nbsp;<\/p>\n\n\n\n<p><strong>#1: The more you want something to be true, the more likely you are to make financial decisions as if that thing is<\/strong><strong><em> <\/em><\/strong><strong>true\u2014and the more you\u2019ll risk your financial health.&nbsp;&nbsp;<\/strong><\/p>\n\n\n\n<p>Housel argues that in any high-stakes situation where you have little control, like investing, your desire for a story to be true often drives you to behave as if that story is true\u2014no matter how improbable. But if the story <em>isn<\/em>\u2019t true, acting on it can have detrimental financial effects. For example, in 2021, <a href=\"https:\/\/www.theguardian.com\/lifeandstyle\/2021\/jun\/19\/life-savings-in-crypto-generation-of-amateurs-hooked-on-high-risk-trading\">many people lost their life savings in the volatile cryptocurrency market<\/a>: They <em>wanted <\/em>cryptocurrency to make them money, so they believed it definitely <em>would <\/em>make them money.&nbsp;<\/p>\n\n\n\n<p>(Shortform note: If you\u2019re desperate for something to be true, you might also increase your belief in it by surrounding yourself with people who believe the same thing you do\u2014which is <a href=\"https:\/\/nautil.us\/issue\/69\/patterns\/why-misinformation-is-about-who-you-trust-not-what-you-think\">easier than ever thanks to the ability to connect to various niche groups online<\/a>. And if everybody around you is doing something, <a href=\"https:\/\/www.psychologytoday.com\/us\/blog\/after-service\/201705\/the-science-behind-why-people-follow-the-crowd\">it\u2019s far easier for you to convince yourself to do it too<\/a>.)&nbsp;<\/p>\n\n\n\n<p>Housel contends that when you\u2019re <a href=\"https:\/\/www.shortform.com\/blog\/how-to-plan-for-the-future\/\">planning for the future<\/a>, you\u2019re emotionally invested, and that makes you highly susceptible to attractive stories. The more you <em>want<\/em> something to be true, the more evidence you\u2019ll find to support your opinion\u2014so the more likely you are to become too convinced that an improbable financial future will definitely occur. And if you do, the margin of safety you build into your financial plan might not encompass what happens at all.&nbsp;<\/p>\n\n\n\n<p>(Shortform note: To avoid such a fate, consider following Taleb\u2019s strategy in <a href=\"https:\/\/www.shortform.com\/app\/book\/the-black-swan\/\"><em>The Black Swan<\/em><\/a> of <a href=\"https:\/\/www.shortform.com\/app\/book\/the-black-swan\/chapter-3\">\u201cnegative empiricism\u201d: the process of seeking out information that disproves your original belief<\/a>. By doing so, the less likely you may be to become too convinced of an improbable financial future, and the more margin of safety you\u2019ll build into your financial plan.)&nbsp;<\/p>\n\n\n\n<p><strong>#2: Stories make you confident that you have control when you don\u2019t.<\/strong><\/p>\n\n\n\n<p>According to Housel, we often don\u2019t realize we don\u2019t understand a situation we\u2019re in. This is because, as Housel notes, we create a reasonable explanation that makes sense to us, and we never think to question it. For example, you may see an old man sitting alone on your commute every day, assume he\u2019s on his way to his job, and feel bad that he\u2019s unable to retire. However, he might actually be financially independent and on his way to yoga at his gym\u2014but you never question the story you created, so you never realize it\u2019s wrong.&nbsp;<\/p>\n\n\n\n<p>Housel posits that we make up explanations because it makes us feel like our chaotic world is more predictable and controllable than it is. For example, Housel notes, we continue to pay attention to market forecasts\u2014even though investors generally agree they\u2019re useless\u2014because it\u2019s comforting to believe that the smart person on TV knows what\u2019s going to happen to your money.&nbsp;<\/p>\n\n\n\n<p>(Shortform note: In <a href=\"https:\/\/www.shortform.com\/app\/book\/the-black-swan\/\"><em>The Black Swan<\/em><\/a>, <a href=\"https:\/\/www.shortform.com\/blog\/nassim-nicholas-taleb\/\">Taleb<\/a><em> <\/em>suggests a biological reason we narrativize situations: <a href=\"https:\/\/www.shortform.com\/app\/book\/the-black-swan\/chapter-3\">Interpreting information makes it easier for our brains to store<\/a>. For example, whereas retaining 100 randomly ordered numbers would be near impossible, retaining 100 numbers that were ordered according to a specific rule would be much easier. So when we interpret\u2014or narrativize\u2014we\u2019re attempting to impose our own organizing rule on the random facts of the world.)<\/p>\n\n\n\n<p>Unfortunately, finance <em>isn\u2019t<\/em> as predictable or controllable as we want it to be. Since it\u2019s subject to the whims of human emotions, it doesn\u2019t follow easy, logical rules like science does\u2014and so you don\u2019t have as much control as you want over what happens to your money. When you overestimate how much control you have, you\u2019re likely to ignore factors like chance or others\u2019 decisions and may make poor financial decisions as a result.&nbsp;<\/p>\n\n\n\n<p>For example, Housel cites how entrepreneurs are overwhelmingly\u2014and incorrectly\u2014confident that their success depends at least 80% on factors within their control. They underestimate critical external factors they\u2019re not intimately aware of, like their competitors\u2019 plans, and instead create a <a href=\"https:\/\/www.shortform.com\/blog\/motivational-success-stories\/\">story of success<\/a> based mostly on their own knowledge. Although Housel doesn\u2019t explicitly state that this mistaken belief drives these entrepreneurs to <a href=\"https:\/\/www.shortform.com\/blog\/make-bad-choices\/\">make poor decisions<\/a>, we can infer that it might: If you don\u2019t think your competitors\u2019 plans will greatly impact your ability to succeed, for example, you likely won\u2019t pay as much attention to them as you should.<\/p>\n\n\n\n<p>(Shortform note: Entrepreneurs may be especially prone to overestimating how much they control their success\u2014and consequently, how likely they are to succeed\u2014because, as one psychologist suggests, <a href=\"https:\/\/www.psychologytoday.com\/us\/blog\/the-science-behind-behavior\/201610\/4-ways-in-which-optimism-helps-entrepreneurs-succeed#:~:text=are%20depressingly%20small.%20While%20statistics,in%20pointing%20out%20how%20hard%20it%20is%20to\">the people who become entrepreneurs tend to be more optimistic in general<\/a>. After all, 96% of US businesses fail within 10 years, so to <a href=\"https:\/\/www.shortform.com\/blog\/how-to-get-started-as-an-entrepreneur\/\">become an entrepreneur<\/a> to begin with suggests that you\u2019re more optimistic than most people\u2014and may mean that you think you have more control over your life than the average person.)<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Do you allow personal finance stories to change how you use your money? Do finance stories scare you away from making certain decisions or inspire you to invest in certain things? According to Morgan Housel, the author of The Psychology of Money, falling for financial success stories can cause you to make poor financial decisions. Listening to the personal finance stories of others can influence you to risk your financial health based on hope, or even make you think that you have more control than you actually do. Here&#8217;s why you should be careful what stories you believe about money.<\/p>\n","protected":false},"author":8,"featured_media":60171,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,9,24],"tags":[577],"class_list":["post-59771","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money","category-psychology","category-society","tag-the-psychology-of-money","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How Personal Finance Stories May Be Influencing You - Shortform Books<\/title>\n<meta name=\"description\" content=\"Are you inspired by the personal finance stories of others? These stories may actually cause you to risk your financial health. Here&#039;s how.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.shortform.com\/blog\/personal-finance-stories\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How Personal Finance Stories May Be Influencing You\" \/>\n<meta property=\"og:description\" content=\"Are you inspired by the personal finance stories of others? These stories may actually cause you to risk your financial health. 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