What Happens When the Desire for Wealth Overtakes the Sense of Reason?
May 13, 2011I recently saw a news article that caught my attention. The headline was a grabber: A woman had been arrested for stealing half a million dollars from her in-laws to help pay off her gambling debt. She had acquired about 14 million dollars in debt over 2 years. But the real news for me lay in the sentence that followed. She had also won 13 million dollars over the same period of time. This fact seemed noteworthy. Yes, the woman had a gambling addiction. She was arrested for stealing from her in-laws. But, she also had an obvious winning streak. To amass 13 million dollars in winnings takes some luck, or possibly even skill. However, by the end of her run (which coincided with criminal charges!), with all of her time and money she was no better off, indeed much worse off, than when she started.
I began to think about what it really takes to accumulate wealth. What are the ingredients? Is it sheer volume of cash inflow, or is it the skill to manage it? I have met many people who have had large amounts of money go through their hands, but their ability to manage it and grow it was no more skilled than pulling the lever on a slot machine. The assets they possess are at the mercy of the latest urge to roll the dice, whether it’s on questionable stocks, highly leveraged real estate or the latest get rich quick scheme.
I wonder if there isn’t a little bit of risk-taker in all of us, but what happens when the desire for wealth overtakes the sense of reason? Do we give in to the impulse to “risk it all?” Several studies show that this impulse exists in investors. The book, Strategic Risk Taking, by Aswath Damodaran talks about this in a chapter about risk taking behavior, and in a paper for the American Economic Association, Laurent Calvert and Paolo Sodini, discuss increased risk taking with increased wealth.
So, what the woman in Florida did (a criminal act and completely out of the realm of what most of us would consider rational) was simply show the outer edge of investment portfolio risk taking. Sometimes it takes an absurd example to illustrate a point, and she certainly did that!
So, how can we protect ourselves (if we’re wired to take on higher levels of risk) from our impulse to take on more risk than we should? Hiring an advisor, such as a Certified Financial Planner™, can help provide oversight and help with an overall guiding philosophy as seen in this column.
Yes, having large inflows of money helps, but it takes more than that alone to make more money. It takes sensible, strategic planning and a measure of discipline as well. At times, it takes wisdom and the ability to just say “NO!” and walk away.