Last updated April 10, 2022

Status: Author: Medium: #literature/books/finished Tags: Links: Currently Reading List - { The Psychology of Money Application

📚 The Psychology of Money

• Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.
• Financial success (the psychology of money) is our skills rather than our knowledge
• We are taught finance like physics with rules and laws, rather than like psychology, with emotions

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

• We can try our best to educate ourselves and hear from the stories of others, but we will never truly understand how things feel unless we experience it ourselves
  • Some lessons need to be experienced before they can be understood
• The early experiences we have tend to dictate our thought patterns for the rest of our lives
  • ex) A crash in renewables may scare you from diving into them
  • It has nothing to do with our intelligence, it was pure luck
• It’s not that people are crazy and make bad choices, it’s that they have different experiences
  • Would a person really do something that they don’t think is somewhat right?
  • Not only are people biologically different, they are also environmentally different
    • ex) A rich person would not understand why poor people are so desparate to win in the lottery

2 - Luck and Risk

• Risk and luck are the same

“Nothing is as good or as bad as it seems.”

• Bill gates had a 300/300 million chance to have access to a computer in middle school
• His friend, Kent Evans, had a 1 in 1 million chance of dying while on a mountain

The accidental impact of outcomes outside your control can be more consequential than the ones you consciously make

• We can never truly know how much of our outcome resulted from luck vs our decision
• Two pieces of advice:
  1. Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
  2. Focus less on specific individuals and case studies and more on broad patterns.
• Thus, we should accomodate for risk and be more understanding of our mistakes

3 - Never Enough

• It’s important to set a goal that we are satisfied for to prevent ourselves from mindlessly pursuing nothing

There is no reason to risk what you have and need for what you don’t have and don’t need.

• The hardest financial skill is to not let greed affect our goals
• Social comparison manifests greed and envy
  • Social comparision sets an unrealistic standard that is virtually unattainable
    • The best way to survive is to not enter the game in the first place
• Enough is enough, not too little
  • We only know how much we can eat once we are nauseous
• Some things are not worth risking, no matter the potential gains
  • Reputation, family, friends, love, and happiness is invaluable, and we shouldn’t take risks that can harm them

4 - Confounding Compounding

• Compounding op

It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.

5 - Getting Wealthy vs Staying Wealthy

• Getting money requires risk, optimism, and boldness
• Keeping money requires humility, fear of losing, frugality, and acknowledging luck
• Survival mentality helps us maintain our wealth

  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.

  • Have a margin of safety by allowing more room for error and planning for the unexpected
  • Be optimistic about the future, but paranoid about the potential obstacles

6 - Tails, You Win

• Tails, the extremely rewarding 1% of our choices, can make up for all of our losses

Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control; a good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy

• People make a shit ton of decisions that have bad outcomes
  • It’s not about our success rate but rather the weight of our success vs the weight of our failures

7 - Freedom

• A person’s freedom of time is the most frequent cause of happiness
• People hate being told to do things, even if they are personally interested in it
• With work being portable, people are more engaged in work than ever before

8 - Man in the Car Paradox

people tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.

• People don’t look at the driver, they look at the car
• If recognition is our goal, there are other ways to seek it

9 - Wealth is What You Don’t See

• People may assume wealth through one’s possessions, but that only means that their wealth is decreasing
  • It doesn’t say anything about their savings afterwards or their job
• Much like not treating yourself after an exercise, growing wealth requires having the self control to not indulge in rewarding activities
• It’s hard for people to build wealth since people only see the outcomes (cars, jewellery, houses), but not the process

10 - Save Money

• Saving money is the practice that is most under our control
• Wealth is our leftovers after our expenses
• Others can make more than us, but if we need less money to be content, we may end up wealthier
• Developing our humility discourages us from buying materialistic things to flex
• To truly adopt a saving mindset, we need to desire less
  • Goals like a new house can help, but overall mindfulness is possible and recommended
• Saving money gives us freedom in the sense that we have more flexibility with our options
  • Can switch jobs, retire for a bit, etc
• Lots of people are smart, so it’s important we are also flexible to reach more opportunities others may not

Having more control over your time and options is becoming one of the most valuable currencies in the world.

• If I can control my time to how I want to use it, holy shit

11 - Reasonable > Rational

• Being reasonable with financial decisions is more realistic in comparison to being rational
• Reasonable decisions provides a peace of mind and is made with consideration for our future regrets

The reasonable investors who love their technically imperfect strategies have an edge, because they’re more likely to stick with those strategies. The historical odds of making money in U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods.

12 - Surprise

• Using historical data to plan our investments is not entirely optimal, all investors are prone to changes in feelings that can sway the future

• Focusing on history:

  1. Makes us miss outliers that make changes
  • The world is full of surprises
  1. Doesn’t account for modern, structural changes
  • Intelligent investor has some good ideas, but few of them are still applicable
    • When looking back in history, we should be more general with our found principles

13 - Room for Error

• Having a margin of safety helps us accomodate for uncertainties
  • Plan as if our plan will not go as intended
• We can neglect room for error when:
  • When we think we know the future due to the uncomfortability of admitting the opposite
  • Not taking actions that best fit the actual situation of our perceived future
• Don’t just think financial margins, but mental ones
• No extreme risk is ever worth taking, even if there are favorable odds
• Have back-ups and multiple support structures for things and events to prevent an instant ruining

14 - You’ll Change

• Long-term planning is difficult because we change
  • We tend to underestimate how much we will change in the future

At every stage of our lives we make decisions that will profoundly influence the lives of the people we’re going to become, and then when we become those people, we’re not always thrilled with the decisions we made

• Moderation in all aspects of our lives can keep things sustianable
• Have no sunk costs and anchors when it comes to financial commitment

15 - Nothing’s Free

• fees (a price worth paying to get something nice in exchange) rather than fines (a penalty you should avoid)
• Investing in index funds seems like free money, but we fail to acknowledge the constant influx and change in prices that may sway our emotions
• Treat market volatility as a fee rather than a fine to help stay persistent
  • To overcome dips, we must convince ourselves that the volatility fee we pay is worth it
    • It’s not always guaranteed, but we can never find peace by viewing it as part of the process and intentional

16 - You and Me

• Be sure the information you gather from external sources is relevant to your own situation
• The favored entry price of a stock depends on our intentions for holding it
  • If day-trading, we would want a quick dip
  • If long-term holding, you wouldn’t care as much if you bought at the all-time high
• Bubbles are formed as people are always chasing profits, squeezing the most out of a favorable situation
  • Damage occurs when long-term investors take cues from short-term traders
    • It’s important we identify and understand our own time horizons, gathering information that is relevant to our choice
      • Have an investing statement

17 - The Seduction of Pessimism

• Optimism entails envisioning a favorable outcome while still acknowledging the setbacks that may accompany it
• People are skeptical of optimism, but are curiously attracted to pessimism
  • Unfortunate events are perceived as risks, which heavily outweight their opposite equivalents
• Pessimists tend to neglect adaptability and change
• Progress may not be noticed due to slow steps, but setbacks happen too quickly too ignore
  • ex) a 40% decline that takes place in six months will draw congressional investigations, but a 140% gain that takes place over six years can go virtually unnoticed
  • People can spend years working on their image, only for it to be ruined by a single act
  • Identify the fees of success (volatility, loss), and be willing to pay for it

18 - Believing Anything

• Stories > Statistics
• Confirmation bias
• The bigger the gap between what we want to be true and what our acceptable outcome is, the more room for error we have
• Filling in the gaps in our knowledge
  • Hindsight bias
  • It’s better to accept that we don’t know things than to come up with delusional reasonings
    • Consider the thoughts and outside world as much as our own actions

19 - Summary

• It’s difficult to give financial advice, as everyone is different

Recommendations

• Express humility during good times, and forgiveness during bad times
• Less ego, more wealth
• To make sure you are making sound financial decisions, ask yourself, “does this help me sleep at night?”
• Increasing time horizon is invaluable for investing
• Look at the overall portfolio vs small investments
• Use money for more time

20 - Confessions

The author:

• Desires family financial security and independence
• Lacks a moving goalpost
  • Finds pleasure through walks, reading, podcasts
  • Exists the financial race
• 20% cash
• Stocks should be picked to reflect long-term goals
• Beating the market is naturally hard and rare
• index funds to reduce effort and risk
  • There is little correlation between investment effort and investment results

References:

Created:: {{0pmt0:2021-06-27}} 12:57