The Psychology of Money Recap

So I just finished up the book called The Psychology of Money by Morgan Housel. As part of my practice to start writing more often and to ensure I actually learned something from reading the book, here are some of my takeaways. This summary will be a mixture of personal opinions, summaries, and quotes taken from the book itself. I’m not sure which ones are quotes and which ones aren’t so… just take it as it is.

I found this book fascinating. Not only did I feel like it was a good book to give you a framework on how to view money, a lot of lessons felt applicable to how you should view self-improvement and life in general. So with that, let’s begin.

#1 No One’s Crazy

As much as we might find other peoples’ spending habits out of the ordinary and maybe even straight-up ludicrous, it’s important to realise that everyone learns different lessons depending on how they grew up. This would be down to how they were raised as a child, the kind of life experiences they went through, and the environment they were in.

This is very much applicable to general human behaviour as well. At times, we look at our friends and wonder how they constantly fall into the same destructive behaviours and patterns that we told them to avoid. Simply put, it’s because our different views on the rules of the world and the people around us were developed differently. Sometimes, others have to go through what we went through before they would understand where we’re coming from, and vice versa.

Some lessons have to be experienced before they can be understood.

#2 Luck & Risk

Always respect luck and risk, which are factors outside of our control that might have huge consequential outcomes on our life.

It’s easy to judge others’ failures down to bad decisions while justifying our own as getting the short end of the stick from risk.

Risk and luck are doppelgangers.

So it would be wise to be careful as to who we praise and admire, and who we look down upon and wish to avoid becoming.

Focus less on individuals and more on broad patterns.

Recognize the role of luck in success but acknowledge risk as well. Keep humility when things are going well, but practice forgiveness and compassion when judging our failures.

#3 Never Enough

You’d want to have a sense of enough for yourself. Not having enough means nothing will satisfy you.

There’s no reason to risk what you have and need for something you don’t have or don’t need.

The hardest financial skill is to get the goalpost to stop moving.

I personally believe that building your sense of ‘enough’ is done through a grateful appreciation of what we already have. Once you’re grateful for the things you own, you’ll have a greater sense of what more you would need to satisfy your needs, hence giving you a measure of what ‘enough’ means to yourself.

‘Enough’ is realising that an insatiable appetite for more would push you to regret.

#4 Confounding Compounding

Basically just talking about the power of compounding. Savings, investments, etc.

Honestly so applicable not just to investing, saving, or money for that matter, but also to how someone should view self-improvement.

Compounding is a long-term game, and the dividends you’d get from the consistent effort would be exponential. Delayed gratification is the thing that you’ll have to deal with really strongly, which is something I personally suffer from I guess.

Be it investing, YouTube, or a relationship with someone, it’s imperative to stay consistent and constant in order to reap the exponential rewards one might want to gain.

#5 Getting Wealthy vs Staying Wealthy

Keeping money requires humility, and fear that what you’ve made can be taken from you just as fast.

You can be rich, but if you constantly expend beyond your means, you’ll still end up poor anyway. Those that are truly wealthy in terms of monetary value actually KEEP the wealth that they have accumulated, rather than splurge on a lavish lifestyle that’s not sustainable nor really needed in the first place.

To keep yourself wealthy would be to have humility about the wealth that you own. To be grateful for what you already have, and to know what having ‘enough’ means to yourself, rather than building an extensively exorbitant lifestyle to impress. You care about yourself, and not what others think about you.

#6 Tails, You Win

You could be wrong most of the time, yet once you have something that pays off it could be stupendously right.

A lot of rules taught in the modern world are based on ‘tails’ events that have happened, massive outliers in the grand scheme of things.

Tails drives everything.

Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

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.

#7 Freedom

The highest form of wealth is the ability to wake up every morning and say ‘I can do whatever I want today’.

Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.

People like to feel like they’re in control — in the driver’s seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.

#8 Man In The Car Paradox

This is a paradox illustrating what someone who yearns for the respect and admiration of others through superficial means really receives.

When a man gets a high-end car with the idea of showing off, to earn their respect and admiration, what he gets instead are a bunch of people that see what they could have to get that respect and admiration for themselves.

Essentially, they don’t give you, the person any look or thought.

I find this particularly compelling. I used to look upon people who achieved a lot at my age and think to myself it must be really nice to get all of that recognition. I’d then think to myself that I want to gain that for myself as well, so I could feel that sense of achievement as well. In hindsight, maybe it was to make it seem like I was a high achiever as well.

You get more drawn in on their achievements rather than the individual.

Humility, kindness and empathy will bring you more respect than horsepower ever will.

#9 Wealth is What You Don’t See

We tend to judge wealth based on what we see because that’s all the information we have in front of us. We rely on outward appearances to gauge financial success.

The only way to be wealthy is to NOT spend the money that you do have.

People want to be wealthy to have flexibility and freedom, but it has been ingrained in us that to have money would be to spend that money. In doing so, we don’t see the restraint that’s actually required to be wealthy.

#10 Save Money

Building wealth has little to do with income and investment returns, but lots to do with savings rate.

The value of wealth is relative to what you need.

One of the most powerful ways to increase savings isn’t to raise your income but to raise your humility.

Savings can be defined as the gap between your ego and your income.

Savings can be created by spending less.

You spend less when you desire less.

You desire less if you care less about what others think about you.

Money relies more on psychology than finance.

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

#11 Reasonable > Rational

Aiming to be reasonable rather than rational is something more people should consider when making decisions with money.

Being purely logical with money, when money is something that holds a lot of emotional decision making would be close to impossible.

A better way to go about it is to be reasonable about it. If you want to indulge and it’s within your means, go ahead.

#12 Surprise!

History is not a map of the future.

Investing is not a hard science, but a group of imperfect people making imperfect decisions.

Experiencing specific events does not necessarily qualify you to know what happens next.

Basically… you can’t predict the future. Especially in investing.

#13 Room for Error

You have to plan for your plan not going to plan.

Increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.

The purpose of a margin of safety is to render the forecast unnecessary.

Two reasons why we want to avoid room for error:

  1. The idea of needing to know what the future holds.
  2. Driven by the uncomfortable feeling that comes from admitting the opposite.

You can be risk-loving but be averse to ruin.

The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.

#14 You’ll Change

People are poor forecasters of their future selves.

Imagining a goal is easy and fun, but in the context of realistic life, stresses are something different.

All of us are walking around with an illusion that our personal history has come to an end, that we have recently become the people that we were always meant to be and will be for the rest of our lives. That’s not true.

We should avoid the extreme ends of financial planning, and also accept the reality of our changing minds.

Sunk costs, anchoring decisions to past efforts that can’t be refunded, are a devil in a world where people change over time.

They make our future selves prisoners to our past, different, selves.

It’s the equivalent of a stranger making decisions for you.

#15 Nothing’s Free

You can’t reap all the rewards while always avoiding the volatility.

If you view volatility as a fee, things look different.

In investing, volatility is a fee to pay, not a penalty.

#16 You & Me

Play your own game. Each person has their own goals when it comes to investing, and life in general.

E.g. Someone is planning to work multiple internships to gain a place in a FAANG company in the future. You might want to start a bakery. It wouldn’t make sense for you to play their game and work multiple internships instead of learning the inner workings of bakeries when your end goal isn’t the same.

#17 The Seduction of Pessimism

Pessimism sounds intellectually captivating, and it’s paid more attention to than optimism, which is often viewed as being oblivious to risk.

Optimism is a belief that the odds of a good outcome are in your favour over time, even when there are setbacks along the way.

The foundation of optimism is the simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble.

Forecasts of outrageous optimism are rarely taken as seriously as prophets of doom.

Pessimists often extrapolate present events without accounting for how markets adapt.

Progress happens too slowly to notice but setbacks happen too quickly to ignore.

Expecting things to be great means a best-case scenario that feels flat.

Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about.

Expecting things to be bad is the best way to be pleasantly surprised when they’re not. Ironically that’s something to be optimistic about.

#18 When You’ll Believe Anything

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.

  • An appealing fiction happens when you are smart, you want to find solutions, but face a combination of limited control and high stakes.
  • The biggest risk is that you want something to be true so badly that the range of your forecast isn’t even in the same ballpark as reality.

Everyone has an incomplete view of the world, but we form a complete narrative to fill in the gaps.

  • When confronted with something we don’t understand, it’s because of our unique perspective in our life, however limited that experience is.
  • We all want to make sense of our complicated world.
  • We tell ourselves stories to fill in the gaps of what are effectively blind spots.

Philip Tetlock writes:

We need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who satisfy that need.

We want to believe we are in control, and the illusion of control is more persuasive than the reality of uncertainty.

We cling onto stories about outcomes being in our control.

#19 All Together Now (Summary)

  1. Go out of your way to find humility when things are going right and forgiveness and compassion when they go wrong. It’s never as good or as bad as it looks.
  2. Less ego, more wealth.
  3. Manage your money in a way that helps you sleep at night.
  4. If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
  5. Become okay with a lot of things going wrong. You can be wrong half the time and still make a fortune.
  6. Use money to gain control over your time.
  7. Be nicer and less flashy.
  8. Save, just save. You don’t need a reason to save.
  9. Define the cost of success and be ready to pay it. Nothing is free. Most financial costs don't have visible price tags.
  10. Worship room for error.
  11. Avoid extreme ends of financial decisions.
  12. You should like risk because it pays off over time. But be paranoid of RUINOUS risk.
  13. Define the game you’re playing. Make sure your actions aren’t influenced by people playing a different game.
  14. Respect the mess. There is no single right answer.

In Conclusion…

A lot of the teachings from The Psychology of Money are more versatile than one might think, and I believe that a lot of it is not just applicable to the realm of personal finance and investing, but to life in general.

Particular favourite points of mine would be:

  • The allure of pessimism, and how setbacks happen too quickly to ignore yet progress happens too slowly to notice.
  • People form a complete narrative to fill the gaps in our incomplete view of the world to make sense of it. Wanting something to be true so badly that our range of forecast isn’t even in the same ballpark as reality.
  • The fact that no one is crazy, and that everyone has their own experiences which have come to formulate their version of the world and reality.
  • Having a sense of enough. Having a deep appreciation and gratefulness for what you have rather than a need to show off wealth is what would bring you happiness. And being grateful comes from realising how much is enough for yourself.
  • Man In Car Paradox. What you show externally in the form of the superficial will not bring you the respect you want. Rather, it’s humility, kindness, and empathy that will make you feel seen more so than external showing offs ever would.
  • The value of true freedom is having control over your time and what you want to do every day you wake up.

So yeap, that’s my recap of this amazing book I’ve read so far. What a great book. I guess it’s time to pick up reading again…

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