THE PSYCHOLOGY OF MONEY
By: Morgan Housel
There are two ways of looking at finance. First outer way in which you examine how the stock market works, how to select stocks or build a portfolio, how to time the market, etc. the second is looking into the human component of money i.e.relationship between people and money. Author examines personal finance through the lens of human behaviour. Its all about understanding human behaviour when it comes to money and finance.
“To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism.”
In this book, Morgan Housel shares 19 stories exploring the strange ways people think about money. It covers observations on our relationship with money and tells us how our thinking towards finances drives the critical decisions of our life. It’s a book that tells you doing well with money has a little to do with how smart you are and a lot to do with how you behave.
NO ONE’S CRAZY:
This chapter considers the limits of our understanding vis-à-vis the limits of our personal experiences. Consider that we are all, in the grander scheme of things, woefully inexperienced.
“Your personal experiences with money make up maybe 0.00000000001% of what’s happened in the world, but maybe 80% of how you think the world works.”
People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experience different job markets with different incentives and different degrees of luck, learn very different lessons. No one’s crazy we all make decisions according to our circumstances.
LUCK & RISK:
Nothing is as good or as bad as it seems. This section talks about two unavoidable and important factors in life and everything we do. LUCK AND RISK. They are there and you have to learn to understand them. As the author puts it, “The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.“
These are two forces beyond our efforts. It’s important to take examples wisely. We many times tend to focus on extreme examples—billionaires, the CEO, or examples of extreme failures. Such can be dangerous. The author advises us,
“Therefore, focus less on specific individuals and case studies and more on broad patterns.”
Learn from your success, but more so from your failures. As Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favour.
“Be careful when assuming that 100% of outcomes can be attributed to effort and decisions.”
NEVER ENOUGH:
When rich people do crazy things.
“The hardest financial skill is getting the goalpost to stop moving.”
It gets dangerous when the taste of having more — more money, more power, more prestige— increases ambition faster than satisfaction.
Modern capitalism is a pro at two things: generating wealth and generating envy.
Happiness, as it’s said, is just results minus expectations.
“Social comparison is the problem here.”
Social comparison is just like a battle which can never be won. It pitches you for more.accept that you might have enough, even if it’s less than those around you.
“Enough” is not too little.”
“Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.
“There are many things never worth risking, no matter the potential gain.”
Reputation is invaluable.
Freedom and independence are invaluable.
Family and friends are invaluable.
Being loved by those who you want to love you is invaluable.
Happiness is invaluable.
And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.
CONFOUNDING COMPOUNDING:
$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities.
Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.
GETTING WEALTHY vs STAYING WEALTHY:
Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.
“There are a millionways to get wealthybut there’s only one way to stay wealthy: some combination of frugality and paranoia.”
“Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.”
TAILS, YOU WIN:
You can be wrong half the time and still make a fortune.
A lot of things in business and investing work this way. Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.
By tail author means the quantity of your ventures and events. By mid 1930s Disney had produced 400 cartoons. Most of them were short, most of them were beloved by viewers, and most of them lost a fortune. Snow White and the Seven Dwarfs changed everything.
By 1938 Disney had produced several hundred hours of film. But in business terms, the 83 min of Snow White were all that mattered. A long tail is what counts.
“REMEMBER TAILS DRIVE EVERYTHING”
Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.
FREEDOM:
Controlling your time is the highest dividend money pays.
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.
MAN IN THE CAR PARADOX:
No one is impressed with your possessions as much as you are.
When the authors son was born he wrote a letter for him, “ you might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. what you want is respect and admiration from other people, and you think expensive stuff will bring it. It almost never does.”
WEALTH IS WHAT YOU DON’T SEE:
Spending money to show people how much money you have is the fastest way to have less money.
“We tend to judge wealth by what we see, because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Instagram photos. Modern capitalism makes helping people fake it until they make it a cherished industry.”
SAVE MONEY:
Building wealth has little to do with your income or your investment returns, and lot to do with your savings rate.
“Independence, at any income level, is driven by your savings rate.”
Spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money.
REASONABLE>RATIONAL:
Aiming to be mostly reasonable works better than trying to be coldly rational.
SURPRISE:
History is the study of change, ironically used as a map of the future.
“A trap many investors fall into is what I call ‘historians as prophets’ fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.”
ROOM FOR EROR:
The most important part of every plan is planning on your plan not going according to plan.
YOU’LL CHANGE:
Long-term planning is harder than it seems because people’s goals and desires change over time.
We should avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret.
NOTHING’S FREE:
Everything has a price, but not all prices appear on labels.
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.
YOU & ME:
Beware taking financial cues from people playing a different game than you are.
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 behaviours of people playing different games than you are.
THE SECDUCTION OF PESSIMISM:
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
“For reasons I have never understood, people like to hear that the world is going to hell.”
Historian Deirdre McCloskey
Money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.
Pessimists often extrapolate present trends without accounting for how markets adapt.
Progress happens too slowly to notice, but setbacks happen too quickly to ignore.
WHEN YOU’LL BELIEVE ANYTHING:
Stories are, by far, the most powerful force in the economy.
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.
We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs.
ALL TOGETHER NOW:
What we’ve learned about the psychology of your own money.
