💸 Morgan Housel - Psychology of Money

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Morgan Housel Psychology of Money

The Recipe

It's never as good or as bad as it looks. Luck and risk are both real and hard to identify.

You'll never build wealth unless you can put a lid on how much fun you can have with your money right now, today.

Manage your money in a way that helps you sleep at night. To each their own.

Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away.

You can be wrong half the time and still make a fortune. A small minority of things account for the majority of outcomes.

The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.

No one is impressed with your possessions as much as you are. What you really want is respect and admiration.

You don't need a specific reason to save. Everyone's life is a continuous chain of surprises.

Nothing worthwhile is free. Uncertainty, doubt, regret are common costs in the finance world and are often worth paying. They're fees, not fines.

Worship room for error as that gives you endurance and endurance makes compounding magic over time.

The more extreme your decisions were the more you may regret them as you evolve.

Risk is great because it pays off over time but you should be paranoid of ruinous risk.

Define the game you're playing and make you're your actions are not being influenced by people playing a different game.

There is no single right answer, just the answer that works for you.

No one's crazy

People are shaped by their experiences and see the world through a different lens. Your personal experience with money make up maybe 0.00000001% of what's happened in the world, but maybe 80% of how you think the world works.

No amount of studying and openmindedness can genuinely recreate the power of fear and uncertainty. I can read about what it was like to lose everything during the Great Depression. But I don't have the emotional scars of those who actually experienced it.

Spreadsheets can't model the feeling of coming home, looking at your kids, and wondering if you've made a mistake that'll impact their lives.

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

Michal Batnick

Individual investor's willingness to bear risk depends on personal history. People invest in what they know and how they've seen the world work. Their intelligence, education or sophistication is much less of a factor. Poor people buy the most lottery tickets which seems crazy to the rest. Germans after WWII could barely feed each other while the US stock market more than doubled. Kids born in 1950s and kids born in 1970 had vastly different experiences.

Modern finance is brand new. Only in the 1980s did the idea of everyone deserving a dignified retirement reach the mainstream and became plausible. 401k is created in 1978. ROTH IRA is created in 1998. Index funds are less than 50 years old. Hedge funds are big for the last 25 years.

We do all of this crazy stuff with money, because we're all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy. We all make decisions based on our own unique experiences that seem to make sense in a given moment.

Nothing is as good or bad as it seems

The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

When judging others, attributing success to luck makes you look jealous and mean, even if we know it exists. When judging yourself, attributing success to luck can be too demoralizing to accept.

Everything worth pursuing has less than 100% odds of succeeding, and risk is just what happens when you end up on the unfortunate side of the equation.

Someone else's failure is due to bad decisions. My failure is bad luck, the dark side of risk.

The line between bold and reckless can be thin.

Risk and luck are doppelgängers.

Be careful when assuming that 100% of outcomes can be attributed to effort and decisions.

Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

Not all success is due to hard work, and not all poverty is due to laziness.

Therefore, focus less on specific individuals and case studies and more on broad patterns.

The more extreme the outcome, the less likely you can apply its lessons to your own life. The more common the latter, the more applicable it might be to your life.

Confounding compounding

Warren Buffet's net worth at the time of writing was 84.5B. Of that, 84.2B was accumulated after his 50th birthday. 81.5B came in his mid-60s.

His skill is investing, but his secret is time.

When compounding isn't intuitive, we often ignore its potential and focus on solving problems through other means.

Getting wealthy vs staying wealthy

Good investing isn't necessarily about making good decisions. It's about consistently not screwing up.

Jesse Livermore shorted stocks before the Black Monday crash and made 3B in one day. He eventually lost it all.

Money success is all about survival.

Getting money requires taking risks, being optimistic, and putting yourself out there.

Keeping money requires the opposite: humility, frugality and an acceptance that luck contributed to your success at least somewhat.

You can't assume that yesterdays success translates into tomorrows great future.

Buffet is a HODLer.

No one wants on hold cash during a bull market. Say cash grows at 1% but stocks return 10%. The 9% gap will gnaw at you every day.

But if that cash prevents you from having to sell your stocks during a bear market, the actual return you earned on that cash is not 1% - it could be many multiples of that, because preventing one desperate, I'll-times stock sale can do more for your lifetime returns than picking dozens of big-time winners.

A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to survive long-term optimism.

I sometimes think that no price is too high for a speculator to pay to learn that which will keep him from getting a swelled head. A great many smashes by brilliant men can be traced directly to the swelled head. It's an expensive disease, everywhere to everybody.

Jesse Livermore

Tails, you win

You can be wrong half the time and still make a fortune.

The great art dealers, like Heinz Berggruen, operate like index funds. The bought everything they could. And they bought it in portfolios, not individual pierces they happen to like. Then they sat and waited for a few winners to emerge.

Long tails: a small number of events can account for the majority of outcomes.

Do not overreact when things fail.

Snow White changed everything for Walt Disney. It was so big that it made all previous gigantic flops (of which there were many) look like minor hiccups.

Anything that is huge, profitable, famous, or influential is the result of a tail event - an outlying one-in-thousands or millions event.

We notice the big things but don't pay enough attention to the tail.

From 2004 to 2014, 0.5% of venture investments grew more than 50x. 65% lost money.

Public stocks are not different. 7% of companies in the Russell 3000 outperform by at least two standard deviations.

40% of public companies go bankrupt.

Tail events are within companies too. Amazon's growth is almost entirely due to Prime services and AWS.

Apple's iPhone is as tail-y as tails get.

How you behaved as an investor in late 2008 and early 2009 will likely have more impact on your lifetime returns than everything you did from 2000 to 2008.

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

It's not whether you're right or wrong that's important but how much money you make when you're right and how much money you lose when you're wrong.


Controlling your time is the highest dividend money pays.

The highest form of wealth is to wake up every day and say “I can do whatever I want today”.

The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.

What matters are quality friendships, being part of something bigger than themselves, and spending quality unstructured time with you children and the people you love.

Man in the Car Paradox

None is impressed with you possessions as much as you are.

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.

When you se a Ferrari, you don't admire the driver, you imagine yourself as the driver.

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.

When most people think about being a millionaire, they're actually thinking about spending a million, which is the opposite of being a millionaire.

Don't spent money you don't have.

Rich is obvious. It's money spent. Wealth is hidden. It's money not spent.

People make this mistake when exercising too. I did the work and I deserve to treat myself to a big meal. Wealth is turning down the treat meal and actually burning net calories.

You can only see a nice house and how someone is rich. But you don't know if that house was bought from money they have or money they didn't have.

Save Money

Investment returns can make you rich. But whether an investment strategy will work, and how long it will work for, is always in doubt.

Past a certain level of income, what you need is just what sits below your ego.

One powerful way to increase your savings isn't to raise your income. It's to raise your humility.

Savings can be created by spending less. You can spend less if you desire less. You will desire less if you care less about what others think.

Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course at your own terms.

Reasonable > Rational

Don't aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it in the long run.

What's often overlooked in finance is that something can be technically true but contextually nonsense.

The reasonable investors who love their technically imperfect strategies have an edge, because they're more likely to stick with those strategies.


History is the study of change ironically used as the map of the future.

Things that've never happened before happen all the time

Scott Sagan

Experiencing specific events rarely qualifies you to know what will happen next. Experience leads to over confidence more then forecasting ability.

The majority of what's happening at any given moment in the global economy can be tied back to a handful of past events that were nearly impossible to predict.

People accidentally assume that the history of unprecedented events doesn't apply to the future. Fukushima nuclear reactor was built to withstand the strongest past historical earthquake but got destroyed by a tsunami. People find it hard to imagine below the historical minimum or maximum yet the most important events are surprises, the have no precedents.

Realizing the future might not look like anything in the past is a special kind of skill.

The correct lesson to learn from surprises is not to try and predict the same previously surprising event such that you anticipate it next time. It's to realize that the world is incredibly surprising and difficult to predict.

An interesting quirk of investing history is that the further back you look, the more likely you are to be examining a world that no longer applies today. Recent history is often the best guide to the future because it's more likely to include important conditions that are relevant to the future.

That doesn't mean we should ignore history when thinking about money. But there's an important nuance: the further back in history you look, the more general your takeaways should be.

General things like peoples relationships to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. But specific trends, trades, sectors, casual relationships are always an example of evolution in progress.

Room for Error

The most important part of any plan is planning on it not going to plan.

A blackjack card counter knows they're playing a game of odds, not certainties.

History is full of good ideas taken too far, which are indistinguishable from bad ideas.

It's wise to acknowledge that uncertainty, randomness, and chance are an ever present part of life.

Margin of safety, i.e. room for error, is the only effective way to safely navigate a world that is governed by odds, not certainties.

Room for error let's you endure long enough to let the odds of benefiting from a low probability outcome fall in your favor.

The biggest gains happen infrequently, either because they're rare or take time to compound.

Room for error should consider the subjective too. Emotions matter. You might be ok losing 30% of your net worth and it might not hurt your day to day life but what if you planned on using that money for your kid's college fund?

The best way to achieve felicity is to aim low.

You have to take risk to move ahead but no risk that can wipe you out is worth taking. The odds are in your favor when playing Russian roulette. But the downside is not worth the potential upside.

You have to survive to succeed. You can plan for every risk except for things that are too crazy to cross your mind. But those things happen more often than you think and can do the most harm because you have no plan for how to deal with them.

As much as possible, be resilient and avoid single points of failure. Everything that can go break will eventually break.

You'll change

Long term planning is harder than it seems because people's goals and desires change over time.

The End of History illusion is what psychologists call the tendency for people to be keenly aware oh how much they've changed in the past but to underestimate how much their personalities, desires and goals are likely to change in the future.

Avoid the extreme ends of financial planning.

People adapt to most circumstances so the simplicity of having hardly anything, or the thrill of having almost everything, wear off. But the downsides of those extremes - not being able to afford retirement or looking back at a life spent devoted to chasing dollars - becomes enduring regrets.

Regrets are especially painful when you abandon a previous plan and feel like you have to run in the other direction twice as fast to make up for lost time. Compounding works when you can give a plan years or decades to grow. This is true not only for money but also careers and relationships.

Endurance is key.

But be careful. Sunk cost - 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 major life decisions for you.

Nothing's Free

Everything has a price, but not all prices are obvious, until the bill is overdue.

Every job looks easy when you're not the one doing it > Jessie Immelt

Most things are harder in practice then they are in theory. Successful investing looks easy when you're not the one doing it.

The price of successful investing is not measure in dollars but in volatility, fear, doubt, uncertainty and regret.

The bigger the returns the higher the price. NFLX returned 35,000% from 2002 to 2008 but traded below its all time high 94% of the days.

The Money gods do not look highly upon those who seek a reward without paying the price. When trying to avoid the price, many times investors end up paying double.

Buying and selling most of the time under performs buying and holding. Yet we all think we can get the win cheaply than the rest.

The price of investing success is not immediately obvious. Thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.

You get what you pay for. The trick is convincing yourself that the market fee is worth it.

You & Me

Beware taking financial cues from people playing a different game than you are.

Whe investors have different goals and time horizons - and they do in every asset class - prices that look ridiculous to one person can make sense to another, because the factors those investors pay attention to are different.

Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly longterm to mostly shorterm. In a bubble, the dominant market price-setters with the most authority are those with the shorter time horizons.

When there's momentum for big short-term returns, profit chasing is inevitable. A stock moving up and to the right attracts speculation. People cannot just stand on the sidelines and miss out.

Bubbles do their damage when longterm investors playing one game start taking their cues from shorterm investors playing another.

Wow, maybe these other investors know something I don't

Many investment decisions are rooted in watching what other people do and either copying them or betting against them.

A few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.

Go out of your way identify what game you're playing.

The Seduction of Pessimism

Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.

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

An example of heavy pessimism that was published in WSJ during the GFC: https://www.wsj.com/articles/SB123051100709638419

Outrageous optimism is rarely taken as seriously as prophets of doom. Pessimism just sounds smarter and more plausible than optimism.

Kahneman and Tversky identified one reason why this happens: Loss aversion →losing $100 will lose more satisfaction than wining $100 will gain satisfaction.

Money is also ubiquoutus. Most bad financial news affects all of us,

We tend to rationalize market downturns more than the upturns.

Pessimists often extrapolate present trends without accounting for how markets adapts. Assuming that something that's ugly will stay ugly is an easy forecast to make. And it's persuasive, because it doesn't require imagining that the world will change. But problems correct and people adapt. Threats incentivize solutions in equal magnitude.

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

Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.

The age-adjusted death rate per capita from heart disease has declined more than 70% since 1965 →500k lives saved per year. We could have a Hurricane Katrina five times a week, every week, and it would not offset the number of annual lives saved by the decline in heart disease in the last 50 years.

When You'll Believe Anything

Appealing fictions, and why stories are more powerful than statistics.

The story we told each other about the coming shifted in 2008. In 2007, we commonly believed that house prices are healthy and bankers are prudent and that markets accurately price risk. In 2009 we stopped believing in that story.

Other than clinging to a new narrative, we had an identical if not greater capacity for growth in 2009 than in 2007 yet the economy suffered its worse hit in 80 years.

When we think about the growth of economies, businesses, investments and careers, we tend to think about tangible things - how much stuff do we have and what are we capable of?

But 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.

Once you pick a strategy or a side, you become invested in them , both financially and mentally. If you want a certain stock to rise 10-fold, that's your tribe. If you think a certain economic policy will spark hyperinflation, that's your side.

Bernie Madoff told a good story and people wanted to believe it.

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

We're all susceptible to explaining the world through the limited set of mental models we have at our disposal. We all look for understandable causes in everything we come across. And we're all wrong about a lot of them.

Most people, when confronted with something they don't understand, do not realize they don't understand it because they're able to come up with an explanation that makes sense based on their own unique perspective and experiences in the world, however limited those experiences are.

We all want the complicated world we live in to make sense.

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

The illusion of control is more persuasive than the reality of uncertainty.

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