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Your Ego and Your Wallet

This article was written by in Featured, Psychology. 9 comments.

This is an article by Marc Pearlman. Marc is a money management professional who has been in the finance industry over 20 years, and he is the author of The Positive Money Mindset and host of the radio show, Your Money Matters.

I watched as these two were duking it out — at the poker table, that is. Fortunately for me, I was out of the hand with my lousy cards safely in the muck pile. I watched with no attachment to the outcome, but I had a prediction of who would come out the victor in this poker showdown. This young kid, probably mid to late twenties with a black hat pulled half way down his head had been quiet most of my time at the table, was squaring off with a middle aged guy. If appearances mean anything, this middle age guy was somebody of means given the designer clothes he was sporting.

Anyway, this kid makes a modest bet and the middle aged guy is quick to match it. Not only does he match the bet, he raised him with a smirk as though daring this kid to come at him again. So, the kid comes back at him with a bigger bet, and again this guy matches him. When all was said and done, both guys had all their chips in the middle and our middle aged poker wannabe had absolutely nothing for a hand. He tried to save face and belted out, “I didn’t have anything, but I couldn’t sit there and watch you walk away with it.”

Poker chipsEgos can be expensive that way.

All too often people make financial decisions out of emotion, which can be an expensive trap for those who have their ego firmly married to their net worth. If we look around, we can see examples of this all across the spectrum of income classes.

Years ago, I worked with a doctor who shall we say did not suffer from a fragile ego. He was interested in putting money with an institutional money manager who had a large minimum investment requirement and a lousy recent track record. I had suggested a manager who demonstrated better performance numbers and who utilized a strategy with less risk. “What is the minimum investment?” the doctor inquired. The minimum was about half of the other managers requirement, I answered. The doctor quickly rebuffed the notion.

It came out in conversation that his peers had money invested with this manager who had the higher minimum. I understood that it was important for him to be part of what he believed to be a prestigious group of investors. Making money was not his motivation, satisfying his ego is what dictated his investment choice.

Another story comes to mind. I once had the opportunity to work with a professional commodities trader. I was hired to help him with his trading deficiencies. This guy had strong opinions on whatever subject was being discussed. He could not possibly fathom that his thought process could be flawed. I introduced him to the concept that being right to him was more important than making money. He scoffed at the idea. In the end, he learned his lesson in a painful way. This trader would hold onto losing positions until he was forced to sell. He vigorously defended his position that he was right only to watch his once several hundred thousand dollar trading account dwindle to less than $20,000.

Ultimately, the ego he was trying to protect was humbled.

Here is yet another example of how our egos can hurt us financially: about a decade ago I had a wonderful client who has since passed away. Great guy, but wow, what a terrible stock picker! Honestly, someone could have made a fortune by simply doing the opposite of what this guy did. He held fifteen stocks in his portfolio, ten of which I had selected for him.Out of the five he picked, every single one was a dog. When I say dog, I mean dog with fleas. They were all down 70 to 80% within a year. I am not suggesting that every selection I made was a homerun, but we were profitable on average with my ten selections.

He would call in on a regular basis to discuss the market. He never wanted to discuss his losing stock picks. Furthermore, I knew it was taboo to mention my winning stock picks. The only subject that was not off limits was the couple of picks I made that were not working out.

When he passed, he still held those losing positions. His refusal to acknowledge his mistakes cost him well over five figures in losses, not to mention the opportunity costs associated with redeploying the money elsewhere.

Big egos often mix with money with the same cohesiveness that oil and water mix. Having an inflated ego is not necessarily the issue, but when your financial decisions are borne from ego, you are in dangerous territory.

Strong and sound financial decisions require letting go of your ego. Often, we need to admit our analysis was wrong and we need to cut losses in order to preserve our hard earned capital. Sometimes the simple truth is that keeping up with the Joneses is going to bring financial ruin.

Many times, laying down your cards is the best thing you can do for your wallet.

Photo: Ross Elliott

Updated February 7, 2012 and originally published February 6, 2012.

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About the author

Marc Pearlman is the author of The Positive Money Mindset and the host of the Your Money Matters! radio show, heard in 19 states. Marc currently maintains a successful investment management firm in New York, where he lives with his wife, Amy, and their three children. View all articles by .

{ 9 comments… read them below or add one }

avatar 1 lynn

The ego can be a detrement to anything in life. Many lost opportunities. My problem is the opposite. I don’t want to loose what I have by making decisions that COULD make me money. It’s the word ‘could’ that holds me back. There have been so many cheats out there, I don’t want to end up being one of their victims. I’m going through this now with the prospect of the Abbett Fund. They have Freddie Mac and Mae in their portfolio and these people scare me.

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avatar 2 Anonymous

Great Read!

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avatar 3 Anonymous

Thats why I advocate taking risk not associated with emotion at all. While I love the thrill of Texas Hold em’, when I’m really trying to come up I play Blackjack. Every move I make to Call, Hit, Double, and Split is based on probability. No emotion involved. Take Money Ball. Every player acquired or dropped was based off numbers. While a World Series wasn’t returned, a group of ordinary players made a substantial mark in the playoffs. Financial Managers do the same thing (or at least try). What i’m saying is often times emotion dictate where our money goes, when simply relying on the numbers (in most cases) will garner you a substantial profit..

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avatar 4 Anonymous

Blackjack can have favorable probability if you play “right” and particularly if you get into a deck and can alter your bet size (without getting tossed from the casino). Poker is much more a game of skill – you can have a far greater return if you combine probability with emotional control, reading/sensing and manipulation.

I advocate taking risks based on other peoples’ emotions (like the young poker player in the article). Behavioral Psychology teaches us that emotions can be predictable. Learning how and using this knowledge when engaging in risky activities will decrease your risk and increase your return.

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avatar 5 Anonymous

This reminds me of my son. His ego talked him into buying a new Camaro that he could not afford. Now he cant sell it and is living with me. I love him, but I already raised the kid ya know…

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avatar 6 Ceecee

The ego is responsible for so many of our money mistakes….like buying things that we simply cannot afford. I get crazy when I see people I know with a brand new car that I know they can’t afford.

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avatar 7 lynn

I used to care about people who did this, then one day I decided that I’m only responsible for my decisions. I don’t feel it’s my responsibility to bail them out either. This would be doing then a dis servce because they would not be learning anything from the mistake they made.

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avatar 8 Anonymous

Hi – Unfortunately, the people who should be reading and learning from this article are not likely to get passed the first few lines. Large ego’s and ignorance normally go hand in hand. Cheers

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avatar 9 qixx

“[All the time] the simple truth is that keeping up with the Joneses is going to bring financial ruin.”

I think this version of the statement to be more accurate. When was the last time you saw the Joneses make decisions that were good for you. They have a hard enough time making decisions that are good for them.

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