five. The Millionaire Next Door

The Millionaire Next Door by Thomas J. Stanley and William D. Danko (Finished: Jan 18 2016)

Rating: 1.5/5

Difficulty: 2/5

Read if: You are interested in pursuing a high income, low expenditure lifestyle and would like to read some success stories, you would like some psychological motivation to become more frugal, you are willing to read studies that are interesting but methodologically flawed, you already consider yourself frugal and would like some fodder for your confirmation bias.

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I will admit upfront that I was pretty disappointed with this book. The book’s premise looks very intriguing – its authors attempt to take a new look at the phenomenon of the “blue-collar millionaire”, and in the process offer personal finance advice to the aspiring young career-person who would like to accumulate personal wealth. The entire book is based around a set of studies conducted by the researchers, who paid a set of millionaires between $100 and $250 to answer a questionnaire about their values, lifestyles, habits and financial philosophies. Among the insights they (probably inaccurately) uncover from such a study are that millionaires tend to buy inexpensive cars, watches and suits, millionaires tend to live in modestly priced houses, and that millionaires tend to enjoy accumulating wealth for wealth’s own sake.

Anyone who has ever picked up an introductory statistics read (here’s a good one) should find reading the description of such a study an excellent exercise set in spotting bad methodological practices. As pointed out by many others, the book suffers from huge survivorship bias, given that it exclusively interviews millionaires, instead of interviewing a cross-section of individuals at many different income levels. This is akin to discovering what makes a lottery winner successful by only interviewing lottery winners, and then concluding that because lottery winners are nearly all left handed that left handed people have a higher chance of winning the lottery. The book presumes that very frugal people are disproportionately likely to become millionaires without interviewing the many frugal people who may not have made it to the top of the wealth ladder. This survivorship bias severely undermines many of the claims the book attempts to make.

There are also many instances of selection bias within this book. It could simply be that millionaires who would deign to offer an hour or two of their time to university researchers for the measly compensation of $100 are simply more likely to be frugal, less consumerist, etc. (a fact that even the researchers themselves admit!) The millionaires interviewed also tend to be within the same age range, simply because it takes a significant chunk of time to accumulate large amounts of personal wealth. These millionaires could happen to share similar values and financial philosophies simply because they were from the same generation. Drawing any sort of sweeping conclusion about how to become successful without accounting for such biases will necessarily give you a very flawed picture of what it takes to become wealthy.

That is not to say, of course, that being frugal and maintaining financial discipline won’t necessarily lead you to a more wealthy future. The idea that maintaining low expenditures and high incomes will help you gain financial success seems like a very reasonable claim. However, a) presumably you do not need to read an entire book to benefit from this simple piece of advice and b) relying on this book as evidence for such a claim would be terribly unwise.

Even putting aside the many methodological flaws within this survey, I found its steadfast emphasis on “wealth accumulation” a little puzzling. While accumulation for the sake of attaining financial independence, sound savings funds, high quality education for your children etc. sounds like a very reasonable financial objective, the book is clear that for millionaires, wealth accumulation is not a means to an end but an end in itself. Often, the book stresses the importance of buying cheap suits and cheap consumables, painting any non-thriftiness as wasteful.

The interviewers and interviewees seem to suggest that the only alternative to thriftiness for the high income earning person is egregious consumerism. This is simply untrue. There are other fine alternatives high income earning people can pursue in lieu of aggressively accumulating wealth, such as giving a significant portion of that leftover wealth to the most efficient charities (a path that has been adopted by several notable multimillionaires), that would perhaps disqualify them from the ranks of the very wealthy but would still let them lead happy, financially independent lives. I think this book does itself a disservice in touting the ultimate goal of wealth accumulation instead of a broader goal of financial independence, which could be applicable to a wider readership.

This book came very highly recommended, but ultimately felt like a waste of precious reading time. At its most useful, it gave me time and reason to reflect upon my own personal finance and practice my evaluation skills. Unfortunately, this book seems to be symptomatic of a larger trend within personal finance books where authors try to sell their readers finance strategies that are poorly backed up. The fact that this book is based on a larger scale study of millionaires makes it marginally more convincing than a book on personal financial success strategies written by a wealthy investor who may simply have gotten lucky, but for me, this is still definitely not the most compelling read out there.