The Psychology of Money#
Started on 2022-04-10; updated on 2022-04-23
by Morgan Housel
started on April 2, 2022
last updated on: 2022-04-19
Introduction#
Financial outcomes are driven by luck, independent of intelligence and effort. That’s true to some extent, and this book will discuss it in further detail. Or, two (and I think more common), that financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.
I love Voltaire’s observation that “History never repeats itself; man always does.”
last updated on: 2022-04-19
Chapter 1. No One’s Crazy#
Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take, and so on.
As investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” We are all victims, in different ways, to that truth.
last updated on: 2022-04-19
Chapter 2 Luck & Risk#
NYU professor Scott Galloway has a related idea that is so important to remember when judging success–both your own and others: “Nothing is as good or as bad as it seems.”
Two things can put you in a better direction
Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
Therefore, focus less on specific individuals and case studies and more on broad patterns.
last updated on: 2022-04-21
Chapter 3 Never Enough#
The hardest financial skill is getting the goalpost to stop moving
Social comparison is the problem here
Enough is not too little
There are many things never worth risking, no matter the potential gain
Happiness, as it’s said, is just results minus expectations.
last updated on: 2022-04-21
Chapter 4 Confounding Compounding#
last updated on: 2022-04-21
Chapter 5 Getting Wealthy vs Staying Wealthy#
There are two reasons why a survival mentality is so key with money.
One is the obvious: few gains are so great that they’re worth wiping yourself out over.
The other is the counterintuitive math of compounding
Applying the survival mindset to the real world comes down to appreciating three things.
More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.
Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
A barbelled personality–optimistic about the future, but paranoid about what will prevent you from getting to the future-is vital.
Many bets fail not because they were wrong, but because they were mostly right in a situation that required things to be exactly right.
last updated on: 2022-04-21
Chapter 6 Tails, You Win#
Anything that is huge, profitable, famous, or influential is the result of a tail event–an outlying one-in-thousands or millions event.
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Chapter 7 Freedom#
last updated on: 2022-04-21
Chapter 8 Man in the Car Paradox#
last updated on: 2022-04-21
Chapter 9 Wealth is What You Don’t See#
last updated on: 2022-04-21
Chapter 10 Save Money#
The first idea-simple, but easy to overlook–is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
More importantly, the value of wealth is relative to what you need.
Past a certain level of income, what you need is just what sits below your ego.
Everyone needs the basics. Once they’re covered there’s another level of comfortable basics, and past that there’s basics that are both comfortable, entertaining, and enlightening.
So people’s ability to save is more in their control than they might think.
And you don’t need a specific reason to save.
That flexibility and control over your time is an unseen return on wealth.
And that hidden return is becoming more important.
last updated on: 2022-04-21
Chapter 11 Reasonable > Rational#
With it comes something that often goes overlooked: Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.
last updated on: 2022-04-23
Chapter 12 Surprise!#
Two dangerous things happen when you rely too heavily on investment history as a guide to what’s going to happen next.
You’ll likely miss the outlier events that move the needle the most.
History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.
The correct lesson to learn from surprises is that the world is surprising.
The average time between recessions has grown from about two years in the late 180os to five years in the early 20th century to eight years over the last half-century.
last updated on: 2022-04-23
Chapter 13 Room for Error#
History is littered with good ideas taken too far, which are indistinguishable from bad ideas. The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance-“unknowns”-are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.
Benjamin Graham is known for his concept of margin of safety. He wrote about it extensively and in mathematical detail. But my favorite summary of the theory came when he mentioned in an interview that “the purpose of the margin of safety is to render the forecast unnecessary.”
There are a few specific places for investors to think about room for error.
One is volatility.
Another is saving for retirement.
You have to survive to succeed. To repeat a point we’ve made a few times in this book: The ability to do what you want, when you want, for as long as you want, has an infinite ROT.
last updated on: 2022-04-23
Chapter 14 You’ll Change#
there are two things to keep in mind when making what you think are long-term decisions.
We should avoid the extreme ends of financial planning.
We should also come to accept the reality of changing our minds.
Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers and relationships. Endurance is key. And when you consider our tendency to change who we are over time, balance at every point in your life becomes a strategy to avoid future regret and encourage endurance.
last updated on: 2022-04-23
Chapter 15 Nothing’s Free#
The question is: Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns?
The answer is simple: The price of investing success is not immediately obvious. It’s not a price tag you can see, so when the bill comes due it doesn’t feel like a fee for getting something good.
It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.
last updated on: 2022-04-23
Chapter 16 You & Me#
Investors often innocently take cues from other investors who are playing a different game than they are.
An iron rule of finance is that money chases returns to the greatest extent that it can.
A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.
last updated on: 2022-04-23
Chapter 17 The Seduction of Pessimism#
Assuming that something ugly will stay ugly is an easy forecast to make. And it’s persuasive, because it doesn’t require imagining the world changing. But problems correct and people adapt. Threats incentivize solutions in equal magnitude. That’s a common plot of economic history that is too easily forgotten by pessimists who forecast in straight lines.
last updated on: 2022-04-23
Chapter 18 When You’ll Believe Anything#
At the personal level, there are two things to keep in mind about a story-driven world when managing your money.
The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
I call these things “appealing fictions. ” They have a big impact on how we think about money- particularly investments and the economy.
Most people, when confronted with something they don’t understand, do not realize they don’t understand it because they’re able to come up with an explanation that makes sense based on their own unique perspective and experiences in the world, however limited those experiences are. We all want the complicated world we live in to make sense. So we tell ourselves stories to fill in the gaps of what are effectively blind spots.
Satisfying that need is a great way to put it. Wanting to believe we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control.
last updated on: 2022-04-23
Chapter 19 All Together Now#
Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.
Less ego, more wealth.
Manage your money in a way that helps you sleep at night.
If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune
Use money to gain control over your time
Be nicer and less flashy.
Save. Just save. You don’t need a specific reason to save.
Define the cost of success and be ready to pay it.
Worship room for error.
Avoid the extreme ends of financial decisions.
Define the game you’re playing
Respect the mess