Money Management: Are Intelligent People Good at it?

A recent experiment was conducted involving forty people with Doctorate Degrees. Their Ph.D.s were not in mathematics, but all were in traditional areas of academic endeavor. The doctorates were given a computer game to trade. They started with $10,000 and were given 100 trials playing a game in which they would win 60% of the time. When they won, they won the amount of money they risked in that trial. When they lost, they lost the amount of money they risked in that trial.

money management activities
American non- mathematical PHD holders were found to have poor money management skills. Photograph by Ken Teegardin, under CC licence.

How many American Ph.D.s made money at the end of the experiment? Two. The other 38 lost money. 95% of these very academically smart people lost money playing a game in which the odds of winning were better than any odds in Las Vegas. Why did they lose? Poor Strategy Rules?

They lost because of poor money management skills. For example, if you start out risking $1,000 and lose 4 times in a row, you are now down to $6000. You might be thinking, I am due for a win now. But that’s nonsense since your chances of winning are and will always be 60%!

Even though your chances of winning are still 60%, let’s say you decide to double your bet size since you are due now. You lose again and you’re down 60% now. If you keep thinking you?re due for a win you will soon be broke with any potential recovery vanished.

Good money management activities are fundamental to avoiding disasters like this one.

Recovering from a draw-down.

Money Management Quotes

You may enjoy some of the following quotes:

Balancing your money is the key to having enough.
― Elizabeth Warren

When you work on something that only has the capacity to make you 5 dollars, it does not matter how much harder you work – the most you will make is 5 dollars.
― Idowu Koyenikan

The strength of your personal financial resources is equivalent to the quality of your financial decision making.
― Wayne Chirisa

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