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Notes From The Psychology of Money


03 Jul 2021 . 11 mins : readings . Comments
#psychology #emotions #book-review #money #finance #trading #notes

I recently finished reading The Psychology of Money by Morgan Housel. It is a fantastic book which talks about finance from a psychological perspective rather than technical. This aspect makes it more relatable and applicable when reading. Following are my notes from the book.


  • A genius is a man who can do the average thing when everyone else around him is losing their minds - Napolean.
  • Money should be studied like psychology, and not physics, maths, etc.
  • Our experience with money makes very little of how money behaves but most of how we think it works.
  • Each individual’s view of money can be drastically different - our past experiences dictate how we see money (mostly).
  • Our risk appetite is based on our experience with risk and luck in the past.
  • All financial decision a person takes makes sense to them; no one’s crazy!
  • The world is too complex to allow 100% of our actions to dictate 100% of the outcomes.
  • In anyone’s success and failure give luck due respect. Nothing is as good or as bad as it seems.
  • Luck is mostly neglected since we want to take credit and our brains prefer simpler black and white answers.
  • The line between “inspiringly bold” and “foolishly reckless” can be very thin and only visible in hindsight.
  • Focus on broad patterns than particular individuals (say Elon Musk) or extreme examples. People with more time are happier is a broad pattern.
  • Always leave room for failures - invest such that wrong decisions don’t wipe out entire wealth.
  • Either it’s enough today or never.
  • It is dangerous when ambitions outpace satisfaction. So, get the goalpost to stop moving.
  • The ceiling of social comparison is infinite - the only way to win is to not participate.
  • Enough is the realization that an insatiable appetite certainly leads to regrets.
  • It is important to know when to stop otherwise harm comes to important parts of life - friends, family, respect, freedom, etc.
  • If something compounds - a small starting base can lead to results so extraordinary that they seem to defy logic.
  • Time is the only important ingredient in compounding.
  • The danger is the temptation to abandon compounding as it’s not apparent and look for other ways. So, shut up and wait!
  • A good investment is earning good returns and repeating for a long time.
  • Getting money and keeping money are drastically difficult skills.
  • The only way to stay wealthy is a combination of frugality and paranoia.
  • The ability to stick around for long enough is crucial - for compounding to work.
  • We can’t assume yesterday’s success translates into tomorrow’s good future. Hence, avoid ruin at all costs.
  • More than big returns it’s important to be financially unbreakable.
  • Planning on things not going according to plan is important. Hence, emergency funds, insurances, etc.
  • A mixture of optimism about the future and paranoia about what’ll stop us from getting there is important.
  • Destruction in the face of progress can be an efficient way to get rid of excess.
  • Short-term paranoia helps exploit long-term optimism.
  • We can be wrong most of the time and still end up making fortune - the world is driven by tails.
  • We should avoid overreacting since it is normal for things to fail.
  • Anything that is huge, profitable, famous, influential is most likely a result of a tail event.
  • Our success as an investor is determined by how we respond to punctuated moments of terror, not years of cruise control.
  • The highest dividend money can pay is control over our time.
  • Using money to buy time and options has lifestyle benefits few luxury goods can provide.
  • Doing something we love on a schedule that we can’t control can feel the same as doing something we don’t like.
  • Buying expensive things to gain respect and admiration never works. Humility, kindness, and empathy bring more respect and admiration.
  • Spending money to show people how much money we have is the quickest way to lose money.
  • Wealth is what we don’t see. However, we judge wealth by what we see since that’s simpler.
  • The way to be rich is to spend judiciously the money we have and never spend the money we don’t have. It’s hard and requires self-control.
  • Building wealth has little to do with our income or investment returns, and lots to do with our savings rate.
  • Learning to be happier with less money is like getting a higher paycheck - only easier and in our control.
  • More humility, more saving. More ego, more spending.
  • We should save just for the sake of saving. Every bit of saving is buying freedom in the future.
  • The intangible value of money surpasses its purchasing power. Sadly, we overlook what we can’t measure.
  • Being mostly reasonable is better than being coldly rational.
  • It is easier to stick with reasonable decisions for a long time.
  • Make financial decisions to sleep well at night and minimize future regrets.
  • There are few financial variables more correlated to performance than the commitment to a strategy during its lean years.
  • Things that have never happened before happen all the time.
  • Over-reliance on past data as a signal to future conditions is a trap when innovation and change drive the field.
  • Do not engage in the over-admiration of people who have been there, done that when it comes to financing.
  • Experience may lead to overconfidence more than forecasting abilities.
  • When relying too much on the past, we may overlook the tail events.
  • Realizing the future might not look anything like the past is a special skill.
  • History can be misleading since it doesn’t account for contemporary structures and processes.
  • The further back we look into history, the more general should be our takeaways.
  • The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance are ever-present.
  • A way to deal with them is by increasing the gap between what we think will happen and what can happen while still leaving us capable of fighting another day.
  • The margin of safety is the only effective way to navigate a world that is governed by odds, not certainties.
  • Two false ideas that cause us to avoid room for error are:
    • believing somebody knows what the future holds
    • thinking we are doing ourselves harm by not exploiting the “known” accurate version of the future.
  • Aim for enduring what’s emotionally possible & not just technically feasible when making room for error.
  • Attachment to favorable odds when the downside is unacceptable is dangerous. For eg. thinking that Russian Roulette will favor us.
  • We should take risks to get ahead but never risks that can completely wipe us out.
  • A good rule of thumb is if anything can break it’ll break. So, avoid single points of failure.
  • Long-term planning is harder than it seems since our goals and desires change over time.
  • We are poor forecasters of our future self.
  • We should avoid extreme ends of financial planning and everything in general.
  • Balance at every point of life is a strategy to avoid future regret and increase our endurance.
  • We should accept the reality of changing our minds - have no sunk costs!
  • Everything has a price but not all prices appear on labels.
  • Things are harder in practice as we’re not good at identifying what the price of success is.
  • Like everything else, the higher the returns the higher the price i.e. risks and volatility.
  • Thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets us stick for long.
  • Always find the price, then pay it. Don’t wait for the bill to get overdue.
  • Beware of taking financial cues from people playing a different game than we are.
  • In hindsight, we are more likely to point to cynical figures than to learn lessons.
  • A rile of thumb - money chases returns to the greatest extent possible.
  • Bubble forms when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long-term to mostly short-term.
  • It’s hard to grasp that other investors have different goals than us because it is non-intuitive to accept that rational people can see the world through a different lens.
  • It’s important to identify the game we are playing and not get persuaded by the actions of people playing a different game.
  • Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help us.
  • Optimism is a belief that the odds of a good outcome are in our favor even when there will be setbacks along the way.
  • Tell someone they are in danger and we’ve their undivided attention.
  • Money is ubiquitous, so something bad happening tends to affect everyone and capture attention.
  • Pessimists often extrapolate present trends without accounting for how markets adapt.
  • Problems correct and people adapt. Threats incentivize solutions in equal magnitude.
  • Progress happens slowly to notice, setbacks happen too quickly to ignore.
  • Appealing fiction & stories are more powerful than statistics.
  • Narrative (story) damage is one of the most potent economic forces.
  • The more we want something to be true, the more likely we are to believe a story overestimating the odds of it being true.
  • An appealing fiction happens when we are smart, we want to find solutions, but face a combination of limited control and high stakes.
  • The larger the room for error, the more protected we are from falling victim to appealing fiction.
  • Everyone has an incomplete view of the world. However, we form a complete narrative to fill the gaps.
  • Coming to terms with how much we don’t know means coming to terms with how much is out of our control. That is a hard pill to swallow.
  • Risk is what’s left over when we think we’ve thought of everything.
  • The illusion of control is more persuasion than the reality of uncertainty.
  • We suggest what makes sense but do what feels right.
  • When dealing with complicated emotional issues, there is no one right answer.
  • True success is existing some rat race to modulate our activities for peace of mind.
  • Good decisions aren’t always rational. At some point,j we’ve to choose between being happy and being right.
  • Everyone without exception eventually faces a huge expense they didn’t expect. So, plan emergencies.
  • Beating the market should be hard. If it wasn’t everyone would do it and if everyone did it then there would be no opportunity.

Me

Your typical geek; Shivam can be found toiling hard through books (away from library) to find what she means by her actions :wink: Hard at work, and harder at drunk dancing, he loves to find ways to increase his productivity so he can invest time elsewhere. When he does get some time, and is in the mood, he writes few lines of code and some lines of rhymes :facepunch: