The Psychology of Money
Introduction: The Greatest Show on Earth
A techie spends money and soon gets insolvent.
Chapter 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.
Next Chapter: How Bill Gates got Rich.
Chapter 2: Luck and Risk
Nothing is as good or as bad as it seems.
Bill gate with the luck of 1/million got rich but his friend with 1/million died in a mountaineering.
The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money.
Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
Focus less on specific individuals and case studies and more on broad patterns.
Next Chapter: Stories of two men who pushed their luck.
Chapter 3: Never enough
When rich people do crazy things.
The hardest financial skill is getting the goalpost to stop moving.
Social comparison is the problem here.
“Enough” is not too little.
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. Happiness is invaluable.
Next chapter: Building enough is remarkably simple.
Chapter 4: 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.
Next chapter: Earning good returns that can’t be held onto - leads to some tragic stories.
Chapter 5: Getting wealthy vs Staying wealthy
Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.
Applying the survival mindset to the real world comes down to appreciating three things.
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.
Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
A barbelled personality - optimistic about the future, but paranoid about what will prevent you from getting to the future - is vital.
Next, we’ll look at another way growth in the face of adversity can be so hard to wrap your head around.
Chapter 6: Tails, you win
You can be wrong half the time and still make a fortune.
Next chapter: How money can make you even happier.
Chapter 7: Freedom
Controlling your time is the highest dividend money pays.
Next chapter: On one of the lowest dividends money pays.Chapter 8: Man in the car Paradox
No one is impressed with your possessions as much as you are.
Next Chapter: Paradox about fast cars
Chapter 9: 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.
Next Chapter: If wealth is what you don’t spend, what good is it? Well, let me convince you to save money.
Chapter 10: Save money
The only factor you can control generates one of the only things that matters. How wonderful.
Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
More importantly, the value of wealth is relative to what you need.
Past a certain level of income, what you need is just what sits below your ego.
So people’s ability to save is more in their control than they might think.
And you don’t need a specific reason to save.
That flexibility and control over your time is an unseen return on wealth.
And that hidden return is becoming more important.
Next chapter: Stop trying to be so rational.
Chapter 11: Reasonable > Rational
Aiming to be mostly reasonable works better than trying to be coldly rational.
Chapter 12: Surprise
History is the study of change, ironically used as a map of the future.
You’ll likely miss the outlier events that move the needle the most.
History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.
Next chapter: How should we think about and plan for the future?
Chapter 13: Room for error
The most important part of every plan is planning on your plan not going according to plan.
Next chapter: Planning on your plan not going according to plan. How this applies to you.
Chapter 14: You’ll change
Long term planning is harder than it seems because people’s goals and desire change over time.
We should avoid the extreme ends of financial planning.
We should also come to accept the reality of changing our minds.
Next chapter: Compounding’s price of admission.
Chapter 15: Nothing’s Free
Everything has a price, but not all prices appear on labels.
Chapter 16: You & me
Beware taking financial cues from people playing a different game than you are.
Chapter 17: The Seduction of Pessimism
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
Few things make financial pessimism easy, common, and more persuasive than optimism.
One is that money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.
Another is that pessimists often extrapolate present trends without accounting for how markets adapt.
A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore.
Next chapter: A story about stories.
Chapter 18: When you’ll believe anything
Appealing fictions, and why stories are more powerful than statistics.
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.
Like the daughter of the author, fits everything into her already-known models.
Chapter 19: All Together Now
What we’ve learned about the psychology of your own money.
Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.
Less ego more wealth.
Manage your money in a way that helps you sleep at night.
If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune.
Use money to gain control over your time.
Be nicer and less flashy.
Save. Just save. You don’t need a specific reason to save.
Define the cost of success and be ready to pay it.
Worship room for error.
Avoid the extreme ends of financial decisions.
You should like risk because it pays off over time.
Define the game you’re playing.
Respect the mess.
Chapter 20: Confessions
The psychology of my (author) money.
Postscript: A Brief History of Why the U.S. Consumer Thinks the Way They Do.
- Inside bill's brain (Netflix documentory)
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