#note/sourcereview/article | #note/sourcereview/book ## What is the Outline? ### [Highlights](https://www.mentalpivot.com/book-notes-the-psychology-of-money-by-morgan-housel/) **Introduction: The Greatest Show on Earth** - “The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave.” - “A genius who loses control of their emotions can be a financial disaster. The opposite is also true. 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.” - Two contrasting ideas: 1. “Financial outcomes are driven by luck, independent of intelligence and effort.” (true to some extent) 2. “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.” (Housel believes this is the more common of the two explanations). [[Knowledge-Implementation Gap]] is key here, people can know they should save money, but they don't actually do it. - “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.” **Chapter 1: No One’s Crazy** - ie [[cognitive frames]] based on our experience makes us see the world a certain way. Each of these is a model, [[all models are wrong but some are useful]] - Consider people most likely to purchase lottery tickets in the U.S.: low-income households who spend, on average $400/year. Number seems crazy to people in higher income households. But some might justify the purchase by saying they are paying for hope and a dream. Without being in their shoes, it’s hard to fully appreciate _why_ they behave the way they do. - Modern financial planning is relatively new. For instance, individual retirement accounts are a recent phenomenon. 401k were created in 1978. Roth IRA was created in 1998. Index funds were developed in the 1970s. - As Housel says, many of the poor financial decisions stem from our collective _inexperience_: “there is not decades of accumulated experience...we’re winging it.” - - "You can't understand fear and uncertainty unless you experience it" [[wisdom can't be told]] **Chapter 2: Luck & Risk** - Outcomes are determined by more than effort. Luck and risk often figure prominently in individual outcomes. - Story of Bill Gates: Gates attended one of the only high schools in the world that had a computer in 1968. Were it not for the efforts of a teacher, Bill Dougall, to procure a $3000 teletype computer, it is unlikely that Bill Gates would enjoyed the same career success. - Gates himself admits as much: “If there had been no Lakeside [High School], there would have been no Microsoft.” - At Lakeside there were three standout computer students (all friends): Bill Gates, Paul Allen, and Kent Evans. Kent Evans was destined for success but met an untimely death in a mountaineering accident before graduation. This is used as an example of bad luck. - “Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort...they both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.” - “The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.” - “Focus less on specific individuals and case studies and more on broad patterns.” - Extreme outcomes are low probability outcomes. Applying the lessons of those who achieved these outlier results isn’t always helpful since external forces of luck and risk may have played immeasurable and non replicable roles. - Instead look at broad patterns that offer directional insights. For instance, [[happy people tend to be those who control their time and energy]] **Chapter 3: Never [[enough]]** - Story about writers Kurt Vonnegut and Joseph Heller (Catch-22) attending a party hosted by a billionaire. Vonnegut remarks that the billionaire makes more money in a single day than Heller made from his popular novel. Heller responds: “Yes, but I have something he will never have...enough.” - Examples of Rajat Gupta and Bernie Madoff: People who had everything but wanted more. They brought ruin upon themselves because the were greedy and didn’t know when to stop. - “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 getting the goalpost to stop moving.” **Chapter 4: Confounding Compounding** [[the hidden power of compounding]] - “Good investing isn’t necessarily about earning the highest returns...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.” **Chapter 5: Getting Wealthy vs. Staying Wealthy** - There are many ways to get wealthy. There is one way to stay wealthy: through a combination of frugality and paranoia. - Nassim Taleb: “Having an edge and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.” - Having a “survival mindset” requires three things: - Aim to be financially unbreakable: be able to stick out swings in the market and stay in the game long enough for compounding to work its magic. - The most important thing to plan for: the plan won’t go according to plan. A good plan leaves room for error. “The more you need specific elements of a plan to be true, the more fragile your financial plan becomes.” - Be optimistic about the future but paranoid about the obstacles to your success. **Chapter 6: Tails, You Win** - Story of the art collector Heinz Berggruen. He amassed an amazing collection of Picassos, Braques, Klees and Matisses. - People were amazed by his art investing acumen. - The reality was that he bought massive quantities of art. Only a subset of his collection was valuable. - “Berggruen could be wrong most of the time and still end up stupendously right.” - “Anything that is huge, profitable, famous, or influential is the result of a [[Tail-Event]] —an outlying one-in-thousands or millions event.” - This is the venture capital model: If a fund makes 100 investments, they expect 80% to fail, a handful to do reasonably well and 1-2 to drive the funds returns. - Consider the distribution of winners and losers in the stock market: most public companies fail, a few do ok and a few generate extraordinary returns. - “When you accept that tails drive everything in business, investing, and finance you realize that it’s normal for lots of things to go wrong, break, fail, and fall.” **Chapter 7: Freedom** - “The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.” - “Money’s greatest intrinsic value...is its ability to give you control over your time.” **Chapter 8: Man in the Car Paradox** **Chapter 9: Wealth Is What You Don’t See** - “Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car.” - “Wealth is financial assets that haven’t yet been converted into the stuff you see.” - Housel reminds us that when people say they want to be millionaires, what it _really_ means is that they want to _spend_ a million dollars. - Spending a million dollars is “literally the opposite of being a millionaire.” - Difference between **wealthy** and **rich**: - People who live in big homes and drive fancy cars are rich. People with big incomes are rich. They display the fact that they are rich. - Wealth is hidden. Wealth is income that is saved, not spent. Wealth is optionality, flexibility and growth. Wealth is the ability to purchase stuff if you needed to. **Chapter 10: Save Money** - “Past a certain level of income, what you need is just what sits below your ego.” Solution: Don’t worry about what other people think or feel the need to keep up with the Joneses. - “The flexibility and control over your time is an unseen return on wealth.” - “Having more control over your time and options is becoming one of the most valuable currencies in the world.” **Chapter 11: Reasonable > Rational** - “Do not 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 for the long run, which is what matters most when managing money.” **Chapter 12: Surprise!** - Scott Sagan (political scientist): [[Things that have never happened before happen all the time]] - Focusing on past history and past patterns may cause two things: 1. Overlooking outlier events that move the needle. [[second order effects]] over time have larger impacts than the first order or direct effects 2. Misreading the present by looking to the past because the past DOESN’T account for the structural changes that are relevant in today’s world. - “The further back in history you look, the more general your takeaways should be.” **Chapter 13: Room for Error** - Blackjack and poker players know they are dealing with **probabilities not certainties**. - The best plan is to plan for things to not go according to plan. - “**Margin of safety**—[[Plan on your plan not going to plan]] you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties.” - “The odds are in your favor when playing Russian roulette. But the downside is not worth the potential upside. There is no margin of safety that can compensate for the risk.” - It is impossible to prepare for or anticipate what you cannot envision. - Minimize the impact of failure by avoiding single points of failure. - “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.” - [[risk is what is left after everything you have thought of]] - Rainy-day funds are a good idea: save for things you cannot anticipate or predict. **Chapter 14: You’ll Change** - We are terrible predictors of our future selves. Our present needs, wants, and reams are not the same as our future needs, wants, and dreams. - “**The End of History Illusion** is what psychologists call the tendency for people to be keenly aware of 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.” - The result is that long-term plans and decision-making is very difficult to do effectively. - Accept the reality that individuals are prone to change. What matters to you today, may be viewed as inconsequential in a decade. - “**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 major life decisions for you.” **Chapter 15: Nothing’s Free** - “The key to a lot of things with money is just figuring out what that price is and being willing to pay it.” - “Successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time.” - “Few investors have the disposition to say, ‘I’m actually fine if I lose 20% of my money...but if you view volatility as a fee, things look different.” - When you invest in the long term, you need to be willing to accept the short-term price of market fluctuations. **Chapter 16: You & Me** - One reason for market bubbles: “Investors often innocently take cues from other investors who are playing a different game than they are.” - Short term momentum attracts investors with short time horizons. “Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field.” But note that the short-term investors will only stick around so long as the momentum continues, but that this momentum is transient. - “Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.” - “It’s hard to grasp that other investors have different goals than we do, because an anchor of psychology is not realizing that rational people can see the world through a different lens than your own.” **Chapter 17: The Seduction of Pessimism** - “Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.” - “Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.” - Daniel Kahneman: “This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms treat threats as more urgent than opportunities have a better chance to survive and reproduce.” - “Pessimists often extrapolate present trends without accounting for how markets adapt.” - Remember the story from chapter 10 about the 1970s oil crisis: pundits failed to account for innovation in fuel efficiency and cheaper, more efficient oil extraction. - Similarly, in the 2000s, as oil prices increased, certain type of oil extraction became economically feasible such as fracking. - Necessity is the mother of all invention and humanity is endlessly innovative. People respond to adversity and problems with new and novel solutions. - “Threats incentivize solutions in equal magnitude. That’s a common plot of economic history that is too easily forgotten by pessimists who forecast in straight lines.” - [[progress is slow, but setbacks and disaster happens quickly and impactfully.]]“There are lots of overnight tragedies. There are rarely overnight miracles.” - “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 instance.” **Chapter 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.” [[confirmation bias]] - Daniel Kahneman: “[[Hindsight, the ability to explain the past, gives us the illusion that the world is understandable.]] It gives us the illusion that the world makes sense, even when it doesn’t make sense. That’s a big deal in producing mistakes in many fields. - Kahneman identified relevant errors in cognition: - When planning we focus on what we want to do and can do and neglect the plans, actions, and decisions of others who might impact our personal outcomes. - When studying the past and forecasting the future we overemphasize individual skill and discount luck. - We focus on what we know and ignore what we don’t know. This results in overconfidence. **Chapter 19: All Together Now** - Chapter is a summary of the lessons in the preceding chapters: humility, less ego, wealth vs. riches, financial decisions that offer peace of mind, use the power of time and consistency, accept failure and risk, strive for time freedom, frugality, make saving a core habit, be prepared to pay the price required for successful outcomes, prepare a margin of safety, avoid extremes, define the game you’re playing. **Chapter 20: Confessions** - This chapter highlights some of the financial behaviors and beliefs of the author: - Independence drives all Housel’s financial decisions. - Live below your means. - Derive pleasure from free or low cost activities: exercise, reading, podcasts, learning. - Three key elements of Housel’s approach: a high savings rate, patience, and long-term optimism. ## What is the other side of the argument? ## What else do I wonder about? ## Action ## When do I want to stumble across this? #on/finances #on/decisions #on/prediction #on/history ## Source: Housel, M. (2020). _The psychology of money: Timeless lessons on wealth, greed, and happiness_. Harriman House. https://www.mentalpivot.com/book-notes-the-psychology-of-money-by-morgan-housel/ ## References, Quotes, Ideas ```dataview table file.mtime.year + "-" + file.mtime.month + "-" + file.mtime.day as Modified from [[The Psychology of Money]] sort file.mtime desc ```