Notes From The Psychology of Money

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.