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Why do we invest in financial markets instead of just
putting all money into simple almost risk-free savings accounts?
Now the first answer you might want to give is, well, financial gain,
increasing personal wealth.
Savings accounts, while they give a steady return,
that return often barely offsets inflation rates.
So it's not very desirable and
not a good investment in terms of increasing personal wealth.
Now, the second set of answers is also the kind of answers
that somebody who enjoys gambling would give you.
All right, they do it for the thrill, they do it for the uncertainty,
not knowing what is going to happen.
They like the emotions behind the gamble, or in this, case behind the investment.
That is to say that we enjoy emotions that the market events trigger in us.
But I could also come back to the first motive,
the one where people say they want to increase personal wealth.
And I could ask you, why do you want to increase personal wealth?
And the answer is likely going to be something like, I would like to retire
early, have a nice retirement, secure the financial future for my children.
Some kind of personal motive.
So, this seemingly objective goal of increasing personal wealth,
is really also driven by personal and emotional needs.
The third motive relates to things like status and value.
That is, how do other people perceived us when they know that we are investors,
when they know what we invest in?
We may enjoy outperforming our peers, our family, our friends.
We may enjoy saying, I knew it, even though we didn't.
The first of these three motives is really the only one from which you can
derive a purely return maximization strategy.
And by return, here, I mean financial return.
The other two motives indicate that you're willing to give up money to pay a price
to satisfy emotional or personal needs.
If you're truly interested in maximizing personal financial gain,
then you need to learn to identify the second and third motive in yourself,
and eliminate them from your decision-making process.
Now, if you're interested in investing in the market, primarily for
the gambling aspect, there's nothing wrong with this per say.
You just need to understand how this is going to affect you financially.
You need to develop a strategy that is not going to hurt you financially in
the long run.
We have already seen that risk avoidance is rooted in emotions, in particular,
in fear.