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House Money

In 2020 and 2021, there has been an insane amount of money made in crypto. But it's not the amount of money made that is the most shocking. It was how fast at which it was acquired and how young the people acquiring it were.

So before you make any dumb mistakes like I did, it's very important to understand the House Money Effect.

The House Money Effect ♠

• Investopedia: The house money effect is a theory used to explain the tendency of investors to take on greater risk when reinvesting profit earned through investing than they would when investing their savings or wages.
• This effect is often used to describe poker players who started with a small deposit and quickly amassed 6 figures. But did they cash out and set up a retirement plan?
• No. Oftentimes, they will just go all-in, double or nothing and we all  know how that story ends
• Had they "earned" the 6 figures by working, they would have been far less likely to risk it all
• In their heads, it felt like they were only risking the initial small deposit. The 6 figures were house money

Young Money 💲

• The house money effect isn't just a casino phenomenon. If you look closer, you'll see it everywhere from equity markets to the one sector where the effect is at play in a never before seen level - crypto
• Never before have so many people so young made so much money so quickly. And tbh it's addicting
• With "Have fun staying poor!" memes and 🚀 emojis, it seems like everyone is getting rich. But the real question is can they stay rich?
• A high-risk appetite and fortunate timing will make you rich fast but having a high-risk tolerance also makes it impossible to stay rich
• Playing with house money doesn't feel like playing with your own money. Well, it is your money. And once you blow your house money, the house rarely gives you a chance to make it back

This piece from Morgan Housel sums it up. I'll end it with one of my favourite quotes:

"Getting rich can be the biggest impediment to staying rich.

It goes like this. The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time.

There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place.”

Before you go...

• Check out issue #55 where we talked about the Lollapalooza effect 🎶
  
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