Investing Psychology Chapter 8: 10 Money Myths That Are Costing You

Chapter 8 of Investing Psychology is where Tim Richards takes everything from the book and turns it into a myth-busting session. Ten myths. All of them things most people believe. All of them wrong. Or at least, way more complicated than we think.

Let’s go through them.

Myth 1: Money Makes Us Happy

We think more money equals more happiness. But Richards points to Daniel Kahneman’s research on the focusing illusion. When studies ask about money and happiness together, people focus on the good stuff money brings and ignore the bad: longer work hours, more stress, watching your portfolio drop.

Here’s the thing. Money is a tool. It gives you security, free time, and less stress. But chasing money for the sake of having more money? That exposes you to every behavioral bias in the book.

Lesson: Invest to do the things you value. Money is a means to an end, not the end itself.

Myth 2: Everyone Can Be a Good Investor

Self-control. That is the secret. People with better self-control trade less emotionally, stick to their strategy, and end up wealthier.

Richards tells a story about fruit sellers in India. Researchers offered them a deal: give up two cups of tea a day for one month, and double your salary forever. They couldn’t do it. They kept buying tea and borrowing money instead.

This isn’t a poor-people problem. We are all bad at resisting temptation. If you can’t control your emotional reactions to the market, you might be better off letting someone else manage your money.

Lesson: Self-control is THE skill for investing. Without it, all the knowledge in the world won’t help.

Myth 3: Numbers Don’t Matter

Only 11 percent of British people could calculate how much money they’d have after two years at 10 percent interest. Other countries weren’t much better. When people can’t do basic math, they rely on gut feeling and following the crowd.

But there is a trap. Too much analysis leads to what Barry Schwartz calls maximizing: trying to make the perfect decision instead of a good-enough one. The sweet spot is knowing enough math to do your analysis but not drowning in data.

Lesson: You need financial math skills. But too much detail can hurt you. Learn what matters and what doesn’t.

Myth 4: Financial Education Can Make You a Good Investor

You’d think education would fix everything. But researcher Lauren Willis found four big problems: financial companies create products faster than you can learn them, most people lack the math, education can make you overconfident, and the key learning moments (buying your first house, first stock) are controlled by financial companies with their own interests.

Education helps. But it is not a shield against institutions that are very good at exploiting your biases.

Lesson: Keep learning, but don’t think a finance class makes you bulletproof.

Myth 5: I Won’t Panic

Yes, you will.

Reinhart and Rogoff analyzed 800 years of financial records and found banking crises happen somewhere in the world every couple of years. If you invest long enough, you WILL live through a panic. And until it happens, you have no idea how it feels. People hold on until the pain gets unbearable, sell at the bottom, then sit on the sidelines watching the recovery.

Ask yourself: what happens if my portfolio drops 50 percent? Invest long enough and it will happen.

Lesson: Panics are coming. If you’re not prepared, you will sell at the worst possible time.

Myth 6: Debt Doesn’t Matter

Don’t borrow money to invest in stocks. When it works, your gains are amplified. When it goes against you, you become a forced seller in a falling market. You dump stocks to cover debts, regardless of whether those are actually good companies.

Warren Buffett compared it to driving with a dagger on your steering wheel. Any accident is fatal.

Lesson: Don’t borrow to invest. The whole point of investing is to sleep at night.

Myth 7: I Can Get 7 Percent a Year From Markets

Everyone quotes the “stocks return 7 percent per year” number. But when researchers recalculated, the real premium for equities over bonds was closer to 2 percent. Not 7.

The behavioral explanation? Myopic loss aversion. People can’t stand losses even for short periods, so they sell too early and hand the premium to more patient investors. Richards says plan for about 3 to 4 percent above inflation. You probably need to invest more than standard advice suggests.

Lesson: Stocks beat other investments, but not by as much as you think. Plan for about 3.5 percent and invest accordingly.

Myth 8: Inflation Doesn’t Matter

Money illusion is when you focus on how much money you have instead of what you can buy with it. Get a 10 percent raise with 12 percent inflation? You’re actually poorer. But most people prefer that over a 2 percent raise with 1 percent inflation, even though the second situation makes you richer.

Always calculate your real return, not nominal. If your investments make 5 percent and inflation is 1 percent, your real return is 4 percent.

Lesson: Always adjust for inflation. The number on your screen is not your real return.

Myth 9: Everyone Has Some Good Investing Ideas, Sometime

This is where the Dunning-Kruger effect shows up. Most people overestimate their abilities by about 6 percent. Normal. But some people overestimate by 60 percent. They are too incompetent to know they’re incompetent. And they come across as super confident. The loudest voice in your investing circle might be the worst investor.

If someone can’t show you a public, verifiable track record, don’t trust their stock tips.

Lesson: Confidence without a track record is a red flag. Don’t take people at face value.

Myth 10: I Don’t Need to Track My Results

Most investors have no idea whether they’re actually beating the market. And our brains make this worse. Research shows we tend to ignore bad news and remember good news. Classic confirmation bias.

You remember your winners and forget your losers. You feel like a great investor when your actual returns might be terrible. Richards offers a simple rule: always look for reasons to sell, because your brain will always find reasons to buy.

Lesson: Track everything. Your brain is designed to trick you into thinking you’re doing better than you are.

The Seven Takeaways

Richards ends the chapter with a clean summary:

1. Know WHY you’re investing. Set your own goals. Stop comparing yourself to others.
2. Money doesn’t make you happy. What you do with money can. Don’t confuse the two.
3. Learn the math you need for investing, but don’t think math alone makes you a good investor.
4. Markets crash regularly. Prepare for it even if you’ve never lived through one.
5. Debt during a crash is a disaster. Just don’t use it.
6. Account for inflation. Expect about 3.5 percent real returns unless you have exceptional skill. Most of us don’t.
7. Track your results. Seriously. Do it.

These myths are comfortable. They let us feel safe and smart. But the research says otherwise. The good news is that just knowing about them puts you ahead of most investors.

Next up: Chapter 9

Previous: Chapter 7