There’s a difference between being wealthy and appearing wealthy

2 June 2015

Thomas Stanley, one of the co-authors of The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, passed away earlier this year.

He was also the author of The Millionaire Mind and several other books, including Stop Acting Rich: … And Start Acting Like a Real Millionaire

I like these books. And I want to believe what they offer. On a deep, intuitive level, I think they’re on the money with respect to some important points.

But I’ve got some major reservations. The fundamental is that the “findings” are derived from flawed sampling methodology. 

An astute commentator on Reddit puts it well: 

I find their methodology for finding millionaires to be… problematic. They mailed the surveys to middle class homes and they offered to pay for the surveys. It’s not any wonder that their typical millionaire didn’t live in an expensive neighborhood and tracked even small amounts of money. Given that they were interviewing millionaires in modest houses, it’s probably not a surprise that the drove modest cars.

Nassim Nicholas Taleb has also been very critical of this work, referring to Stanley’s work as an example of survivorship bias. If you only analyse the characteristics of successful people, you’re not able to compare them with people who are unsuccessful.

For example: you might say that successful entrepreneurs are people who have a high tolerance for risk and don’t let their detractors get in their way. That might be the case, and if you look at a sample of 10 successful entrepreneurs you might be convinced of this, right?

But if you think of it, these characteristics can also be a recipe for disaster. It would give you a better view of the world to look at a random sample of people who have these characteristics, and see if they are actually determinants of success, or characteristics shared by a number of people, successful or otherwise.

So it goes with the premises in Stanley’s work. If you work backwards, it might be possible that the special characteristics of the “millionaires next door” he talks so much about are not so unique to millionaires, and are not highly correlated to becoming millionaires. There might be other important factors at work. You need to look at a broader sample than just those who have succeeded. 

So. You have to take these findings with a grain of salt.

But I like the books, and I think there’s a lot of truth to what they espouse.

In the same Reddit conversation, another contributor put it better than I could

I don’t remember it giving the formula for getting rich. In fact I kind of read it like this: There’s no formula for becoming a millionaire, but guess what – if you are frugal, if you maximize your income, and if you make smart decisions to build your wealth and shelter it, you’ll be well on your way to success. No guarantees, no promises – but that doesn’t make the information false.

Before pointing out a very important insight:

In the end though, what I really gleaned from the book was the eye-opening realization that most of the people around me are pretending to be wealthy. The veil was removed from my eyes, and I now see my neighbors driving expensive cars, living in huge houses and I wonder at what moment did this become the norm, and at what moment in their lives will they realize that they’ve made a huge mistake?


About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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