How to become a millionaire, based on Behavioral Economics

When people pick up a Personal Devolopment book, there is often one thing on their mind. Cold hard cash. Yet, for many Personal Development authors, this is a subject they often beat around the bush in regards to. It’s often considered a taboo and seen as something people shouldn’t want.

People are quick to spout clichés such as “Money can’t buy happiness,” or “Money is the root of all evil,” which are two statements that the data seems to disagree with. In terms of happiness, income has been found to be positively associated with life satisfaction scores, general well-being, and yes, overall happiness. In terms of evil, income is also inversely correlated with crime rates, with impoverished neighborhoods having significantly higher crime rates than affluent neighborhoods. Data like this makes the claim that money is the root of all evil an extremely hard sell.

While money is not the end-all-be-all of happiness, it seems to certainly be a significant factor.

Research from Princeton University indicates that the association between income and happiness is slightly complex. Happiness seems to increase, up into a certain point where happiness due to money seems to plateau. The general rule is: as income rises, so does happiness, until you hit a $75,000 annual income. At that level of income, happiness no longer rises.

There seems to be a point at which happiness is maximized. After that number, it becomes the point of deminishing return

[Note: this research is from 2010 and would needs to be adjusted for inflation for up-to-date numbers. Inflation calculator.]

And of course, this all depends on where you live.

So, enough if dispelling myths, you came here to learn how to make more of it.

To understand how people become wealthy, let’s do a quick thought experiment that we will build upon. The thought experiment is: how can you get someone to give you two dollars? Rules are: you can’t do anything illegal, you can’t do anything coercive or threatening, and you can’t do anything dishonest or immoral. How can you get someone to give you $2. Let’s make it more fun. How can you get someone to literally beg you to take their $2. Try not to cheat, the answer will be listed below, as well as a hint.

Didn’t get it?

Here’s a hint. There’s a popular meme that’s popular on sites such as Reddit. Think about times a meme like this would be used:

Let’s hope you got it. So how do you get someone to give you two dollars? Easy, give them something they would value more than the two dollars they have. Something they would gladly trade two dollars for.

The ways of doing this are endless. You can offer a service, you can create something. You can solve a problem. You can make their lives better.

Research shows that people are looking for solutions, whether they get it from you or learn themselves.

The notion of value is very simple. If somebody buys a candy bar, it’s because at that time, they value the candy bar more than the $1.50 in their pocket. They decided that they derive more pleasure from that candy bar than they do the money They value it more. Going back even further, they value that $1.50 more than the small (or large) amount of time they spent at their job or business it took to make that amount of money. So in reality, they value that candy bar more than the minutes they spent at their job or business that it took them to earn that $1.50. Furthermore, the vendor selling the candy bar values the $1.50 more than the candy bar. Finance is all about trades. Costs and benefits. If a customer wants a new smartphone that costs $700, they value that smartphone more than the time it took them to earn that $700.

This is the basis of behavioral economics. Any action we take is because we believe the reward of said action will outweigh the costs.

And it doesn’t just apply to finances. The reason you wash your car is because you value the nice look of a freshly cleaned car more than you value the time and energy it took to complete the task.

So let’s get to the lesson I promised you… how can you make one million dollars. Well since we learned how to get someone to give you $2, this will just build upon that same concept. The way to make $1 million dollars is to get 500,000 people to give you two dollars. Or to get 10,000 people to give you $1,000. Or to get 20,000 people to give you $500. The combinations are endless. As long as you provide people with something they feel is more valuable than the money they spent, it will be easy.

The more the person values the product offered in relation to the money, the more excited they will be about the trade and the faster they will be to make it.

This is how companies like Apple get people to line up for days in a row, just to hand them $800 for a new product. And no matter how you feel about the companies products, the customers feel the product is more valuable than the $800 they have.

To fully understand money and wealth, it’s important to understand reciprocity. At its core, money is simply a very convenient way of keeping track of favors. In agricultural times you would trade 44 bags of rice for one mule. The problem with this is when you didn’t need 44 bags of rice, it was hard to find another trade. What if a farmer wanted to trade 67 tomatoes for 72 lbs of grass seed. The tomatoes would likely go bad before they were even eaten. So humans developed a system of keeping track of barter. Early systems included used easily traded goods such as animal skins and weapons. From skins and weapons, people began using items such as arrowheads and bronze replicas of weapons as currency. Since these weren’t convenient (and kind of sharp) it eventually evolved into small, round pieces of bronze, which became the first coins used as currency. This is very close to our current financial system.

These coins provided an extremely beneficial way of bartering. They didn’t go bad, you could trade whatever you wanted with them. You could use them now, you could use them later. You could give them to your children, and they could give them to theirs.

But despite the convenience of our modern monetary system, the old barter system still remains at the very core of everything financial. And understanding this is essential to understanding and building wealth. The amount of money you make is in direct proportion to the amount of service you provided to others. Read that again. The amount of money you make is in direct proportion to the amount of service you provided to others.

Bill Gates became a billionaire because he rendered services (in the form of Windows software,) to millions and millions of people. Steve Jobs became a billionaire because he rendered services in the form of millions and millions of iPhones, iPods and other products sold. For the purposes of this lesson we’re going to exclude illicit or immoral examples of people who made money. For those making money in a moral and legal way, it’s because they rendered services greater than or equal to the amount of capital they received as barter.

The companies that are the most successful are the ones who create products that their customers love. Research shows that stock prices directly correlate to Customer Satisfaction.

In business, it seems the best way to be selfish is to be selfless. Figure out how you are benefitting the other person. What people really want are emotions. If they prefer the emotions of whatever is being sold to the feeling of the money they have, they will buy.

There are many ways to apply this knowledge to the real world.

Anything that increase the value of what you do allows you to charge more for your services. One way of doing this is through education. It doesn’t necessarily have to be formal education, although research shows that income directly correlates with educational level attained.

And it’s not just correlational, the relationship between income and education is causal.

From Brookings.edu:

“A college degree can be a ticket out of poverty.

The earnings of college graduates are much higher than for nongraduates, and that is especially true among people born into low-income families. Figure 9 shows the earnings outcomes for individuals born into the lowest quintile of the income distribution, depending on whether they earned a college degree.” Source.

And while employers certainly take note of credentials, it’s more is likely because the quality of work and expertise increases with education.

So employers use qualifications and experience as a proxy for quality of work. While there are exceptions, generally someone who went to a prestigious university and has years of experience will likely produce higher quality work in comparison to someone with lesser credentials and less experience. In the same way that a black-belt would be a better martial artist than a green-belt, a prospective employee with a Masters Degree will likely have a better output than one with a Bacholors degree.

The key takeaway here is, anything you do that increases the quality of your work will make it more valuable to people making it possible to charge a higher rate. Employment is simply a formal way of selling your services to a company. Improve your skills and you can charge more. That may come in the way of a promotion, raise or better offer.

So the larger the impact you have on the world, the more earning potential you will have. Hello millions!