The Psychology of Money

The Psychology of Money

Author : Morgan Housel

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Financial success is not a hard science, but a soft skill driven by how one behaves. This makes sense, because financial markets aren't driven by laws like physics, but is driven by how people behave with their investments.

The book goes on to provide some nuggets of information of how we tend to behave with money, how the market works and general wisdom. I have listed below what I thought the main takeaways are.
1. No one is crazy. People's financial decisions are shaped almost entirely by their past experiences. Especially financial experiences from their early adult life. Each person emotionally optimises for a different circumstance, which they have experienced and therefore seems emotionally probable to occur.
2. Luck and Risk play a role in each of our lives. It's hard to quantify to what extent. And we end up bringing bias into attributing outcomes to luck vs decisions. But all outcomes are actually not as good or bad as they seem, because of luck and risks role in them.
3. One must know how much is enough. Greed, or mindless continued search for more can derail one's life plans and financial plans.
4. Compounding can grow a small amount very quickly. The power of compounding doesn't lie in the size of the starting base, but in the fact that the base remains untouched and can grow itself.
5. Getting money and keeping money require different skills. It's important to not just take risks, but to also be careful and avoid risking the base which is important to you.
6. One needs to hedge their bets. Because a lot of situations have very long tails, if one doesn't hedge their bets they might miss out on the handful of items which drive almost all value.
7. The biggest driver of happiness is the freedom to do what you want when you want. Therefore it's important to avoid the trap of spending money on things we don't need, and time on earning more money. Being a little more minimalist, and creating more time for what you want is a way to create real wealth (happiness).
8. Usually we want fancy things to signal our importance. We fail to realise that a lot of the fancy things might not actually create respect. Think about what one fundamentally wants before spending a lot.
9. Wealth isn't equivalent to spending or whatever is visible. Wealth is the actual financial plans and everything which isn't visible, but is saved or invested.
10. Saving more is a more powerful lever for growing wealth than increasing investment returns.
11. Perfect rationality might be ideal on paper. But, in the real world, it's hard to sustain. Choosing to do things which are reasonable will have greater returns. It is sustainable, and not completely irrational.
12. The past is not a perfect predictor of the future. The unprecedented events, which can't be predicted, move the needle the most. These things for which we can't be prepared perfectly actually matter the most. One needs to prepare not just with math, but with imagination.
13. A margin of error should always be maintained. This doesn't mean just a buffer. One should ensure that independent of the risk reward ratio you should never allow yourself to be completely wiped out. Any risk where the downside is unacceptable should be clearly avoided.
14. Remember that you'll change. Your goals, likes, hopes etc will all change. Regret is expensive. So when you build buffers plan for not just a changing world, but a changing self.
15. Nothing is free. Somethings seem like great return at no cost. It is likely not going to work in the long run. As difficult as it is, you must plan to be able to pay for the returns that you value and need. Plan ahead for this. Don't expect great schemes.
16. The correct price for one person and another are different. Each person has different goals and different priorities. It's convenient and easy to follow the market, but it won't always help you earn the profits that work for you.
17. Pessimism spreads faster, and sounds more realistic/smart than optimism. However, optimism is generally more warranted, in a (financial) world where things on average only improve. This is the case because of our natural loss aversion. With this knowledge in hand, we should try to balance the information we receive and not be overly seduced by pessimistic predictions.
18. The biggest driver of our bets is a powerful narrative. A clear story can move people more than hard facts. Especially if the story taps into the needs that we most have, and offer high stakes. Even though none of us know the full story, narratives that we follow attempt to fill in the blank (correctly or incorrectly). As a result, we believe narratives to be the full story and believe them completely. We are in a hope economy.