The Psychology of Money

No one's crazy¶

Your personal experiences with money make roughly 0.00000001% of what has happened in the world, but will make up about 80% of how you think the world works.

People invest money based on the phases of life they have been.
A stock that makes sense to one and seems like a lucky charm might feel like a ticking time bomb to someone who has seen a similar stock crash in the past.

Luck and Risk¶

Nothing is as good or as bad as it seems.

Luck and risk are siblings; both the reality that every outcome in life is guided by forces other than individual effort.
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 that equation.
It’s possible to statistically measure whether some decisions were wise. But in the real world, day to day, we simply don’t.
The line between bold and reckless can be thin.
Risk and luck are doppelgangers.
Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
- just be careful when assuming that 100% of outcomes can be attributed to effort and decisions.
- not all success is due to hard work, and not all poverty is due to laziness.
- Focus less on specific individuals and case studies and more on broad patterns.
Studying a specific person can be dangerous because we tend to study extreme examples.
“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”
as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.
- IMP - Leave room for failure!

Never Enough¶

To make money they didn’t have and didn’t need, they risked what they did have and did need. - Warren Buffet

If you risk something that is important to you for something that is unimportant to you, it just does not make any sense.
There is no reason to risk what you have and need, for what you don’t have and don’t need.
- Read that again.
Modern capitalism is a pro at two things: generating wealth and generating envy.
- maybe they go together, hand in hand.
Happiness is just results minus expectations.

“The only way to win in a Las Vegas casino is to exit as soon as you enter.” - Casino Dealer
“Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.
- The only way to know how much food you can eat is to eat until you are sick.
- Few try this, vomiting hurts more than any meal is good.
- The same reasoning should, but doesn't translate to money and business in real life.
  
  the inability to deny a potential dollar will eventually catch up to you.
There are many things in life not worth risking, no matter the potential gain.
- Reputation, freedom, family, friends, being loved by those who you want to love you, happiness are invaluable.
- Don't risk the things that matter for something that might make your life potentially better.

Confounding, Compounding.¶

Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.

Linear thinking is so much more intuitive than exponential thinking.
- The danger here is that when compounding isn’t intuitive, we often ignore its potential and focus on solving problems through other means.
- Not because we’re overthinking, but because we rarely stop to consider compounding potential.
The counterintuitive nature of compounding leads even the smartest of us to overlook its power.
- You never get accustomed to how quickly things can grow.
- It’s just hard to wrap your head around that math because it’s not intuitive.
good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated.

Getting Wealthy vs Staying Wealthy [IMP]¶

Good investing is more about consistently not screwing up; than about making good decisions.

There are a million ways to get wealthy, but only one way to stay wealthy: frugality and paranoia
Even if “wealthy” is not a word you’d apply to yourself, the lessons from that observation apply to everyone, at all income levels.
- Getting money is one thing. Keeping it is another.
The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference.
Applying the survival mindset to the real world comes down to appreciating three things.
1. More than big returns, I want to be financially unbreakable. To stick around the long enough for compounding to work wonders.
2. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
3. A barbelled personality -- optimistic about the future, paranoid about what will prevent you from getting there.
Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time
A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality.
The more you need specific elements of a plan to be true, the more fragile your financial life becomes.

Many bets fail not because they were wrong, but because they were mostly right in a situation that required things to be exactly right.
Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery.
Destruction in the face of progress is not only possible, but an efficient way to get rid of excess.
Remember, no price is too high to learn something that will keep a person from getting a swelled head (over confidence).

Tails, You Win¶

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

Remember, tails drive everything.
99% of the investments might turn out to be of little value, but that won't matter if the other 1% turns out to be legendary.
a few companies account for most of the market’s return, but within those companies are even more tail events.
Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.”
Tails
- a tail refers to a rare, extreme event that has a disproportionate impact on outcomes
- Do a lot of things in life and one of them has a higher chance of working out!
When we pay special attention to a role model’s successes we overlook that their gains came from a small percent of their actions.
They may have been more right when they were right, but they could have been wrong just as often as you.
You can be wrong half the time and still make a fortune.

“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 you lose when you’re wrong.” - George Soros

Freedom¶

Controlling your time is the highest dividend money pays.

~refer [[The Four Hour Work Week]]
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.
Control over doing what you want, when you want, with the people you want, is the broadest lifestyle variable that makes people happy.
Contrary to this, reactance - doing something you love on a schedule you can’t control can feel the same as doing something you hate.
aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return.
```
A wise old owl lived in an oak, 
The more he saw the less he spoke, 
The less he spoke, the more he heard, 
Why aren’t we all like that wise old bird?
```

Man in the Car Paradox¶

No one is impressed with your possessions as much as you are.

When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.
- 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.
It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine.

Wealth is what you don't see [IMP]¶

Spending money to show people how much money you have is the fastest way to have less money.

We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes.
Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined.
When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.
the way to be rich is to spend money you have, and to not spend money you don’t have.
The only way to be wealthy is to not spend the money that you do have.
wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later.
Exercise is like being rich. You think, “I did the work and I now deserve to treat myself to a big meal.”
- Wealth is turning down that treat meal and actually burning net calories.

Save Money [IMP]¶

building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
- The world grew its “energy wealth” not by increasing the energy it had, but by decreasing the energy it needed.
Wealth is just the accumulated leftovers after you spend what you take in.
you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.

The value of wealth is relative to what you need.
the real value of money isn’t in the number, it’s in what it does for your life.
Learning to be happy with less money creates a gap between what you have and what you want
- similar to the gap you get from growing your paycheck, but easier to get and more in your control.
A high savings rate means having lower expenses than you otherwise could, and having lower expenses means your savings go farther than they would if you spent more.

Past a certain level of income, what you need is just what sits below your ego.
spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income
- A way to spend money to show people that you have/had money.
  
  You do not need a specific reason to save.
You can save just for saving’s sake. And indeed you should.
- saving for a specific goal makes sense in a predictable world. But ours isn’t.
- Saving is a hedge against life's inevitable ability to surprise the hell out of us at the worst possible moment.
- It gives you options and flexibility. That flexibility and control over your time is an unseen return on wealth
Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or to wait for an investment opportunities that come when those without flexibility turn desperate.

More control over your time and options is being the most valuable currencies in the world.

Reasonable > Rational¶

Aim to be the most reasonable, than rational.
You’re not a spreadsheet. You’re a person. A screwed up, emotional person.
What’s often overlooked in finance is that something can be technically true but contextually nonsense.
If you view “do what you love” as a guide to a happier life, it sounds like empty fortune cookie advice. If you view it as the thing providing the endurance necessary to put the quantifiable odds of success in your favor, you realize it should be the most important part of any financial strategy.

Surprise!¶

History, a study of change, ironically used as a map for future.

Investing is a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy and paranoid.
The most important events in historical data are the big outliers, the record-breaking events.
A handful of outlier events play an enormous role because they influence so many unrelated events in their wake.
The thing that makes tail events easy to underappreciate is how easy it is to underestimate how things compound.
- The most common plot of economic history is the role of surprises.
the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.
The correct lesson to learn from surprises is that the world is surprising.
- Not that we should use past surprises as a guide to future boundaries;
There are single venture capital funds today that are larger than the entire industry was a generation ago.

‘The four most dangerous words in investing are, ‘it’s different this time.’”
The further back in history you look, the more general your takeaways should be.

Room For Error [IMP]¶

There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone
You have to give yourself room for error. You have to plan on your plan not going according to plan.
“the purpose of the margin of safety is to render the forecast ( a prediction of future event) unnecessary.”
Margin of safety—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 best we can do is think about odds.
Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error.
The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking.
Leverage is the devil.
- Leverage—taking on debt to make your money go further—pushes routine risks into something capable of producing ruin.
- You should take risks with one portion and be terrified with the other.
You have to survive to succeed.
The ability to do what you want, when you want, for as long as you want, has an infinite ROI.
You can plan for every risk except the things that are too crazy to cross your mind.
- Those crazy things can do the most harm, because they happen more often than you think and you have no plan for how to deal with them.
A good rule of thumb
- everything that can break will eventually break.
- if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.

You'll change¶

Long-term financial planning is essential. But things change
At every stage of our lives we make decisions that will profoundly influence the lives of the people we’re going to become, and then when we become those people, we’re not always thrilled with the decisions we made.

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 best when you give plans years and decades to grow.
- This is true for careers and relationships.
- Endurance is key.
- Considering our tendency to change who we are over time, balance at every point in your life becomes a strategy to avoid future regret and encourage endurance.
We should come to expect accept the reality of changing our minds.
- Accept the reality of change and move on as soon as possible.

Nothing's Free¶

Everything has a price but not all prices appear on labels.

Every job looks easy when you’re not the one doing it because the challenges faced by someone in the arena are often invisible to those in the crowd.
Like most products, the bigger the returns, the higher the price.
Monster Beverage returned 319,000% from 1995 to 2018—among the highest returns in history—but traded below its previous high 95%
The irony is that by trying to avoid the price, investors end up paying double.
The trick is to convince yourself, the market's fee is worth it.
- That’s the only way to properly deal with volatility and uncertainty —not just putting up with it, but realizing that it’s an admission fee worth paying.
if you view the admission fee as a fine, you’ll never enjoy the magic. Find the price, then pay it.

You and Me (The Author)¶

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

Investors often innocently take cues from other investors who are playing a different game than they are.
It’s common to say the dot-com bubble was a time of irrational optimism about the future.
- Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term.
When you don't know why someone behaves like they do you won't know how long they will continue acting that way, what will make them change their mind, or whether they'll ever learn their lesson.
When someone says you should You should buy this stock, keep in mind that they do not know who you are.
- Are you a teenager trading for fun?
- An elderly widow on a limited budget?
- A hedge fund manager trying to shore up your books before the quarter ends?
- Are we supposed to think those three people have the same priorities
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.
while we can see how much money other people spend on cars, homes, clothes, and vacations, we don’t get to see their goals, worries, and aspirations.
- A young lawyer aiming to be a partner at a prestigious law firm might need to maintain an appearance that, a writer who can work in sweatpants, have no need for.
- But when his purchases set my own expectations, I’m wandering down a path of potential disappointment because I’m spending the money without the career boost he’s getting.

The Seduction of Pessimism¶

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

Pessimism just sounds smarter and more plausible than optimism.
Tell someone everything will be great and they're likely to either shrug you off or offer a skeptical eye.
- Tell someone they are in danger and you have their undivided attention.
- Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.
Other things make financial pessimism easy and more persuasive than optimism.
- Money is ubiquitous (present everywhere, all at once) so if something happens affects everyone and captures everyone's attention.
There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.
Assuming that something ugly will stay ugly is an easy forecast to make.
- It’s persuasive, because it doesn’t require imagining the world changing. But problems correct and people adapt.
- 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.
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.

Expecting things to be bad is the best way to be pleasantly surprised when they’re not.

When You will 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.
- There are many things in life that we think are true because we desperately want them to be true.
It’s hard for a policymaker to predict an outright recession, because a recession will make their careers complicated.
- Even worst-case projections rarely expect anything worse than just “slow-ish” growth.
there is no greater force in finance than room for error, and the higher the stakes, the wider it should be.
Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps. ~ refer How to Not Die Alone#The Monet Effect
We are wrong about a lot of things, because we know a lot less about how the world works than we think we do.
[History] cannot be interpreted without the aid of imagination and intuition.
- The sheer quantity of evidence is so overwhelming that selection is inevitable.
- Where there is selection there is art.
- Those who read history tend to look for what proves them right and confirms their personal opinions.
- They resist inconvenient truth since everyone wants to be on the side of the angels. Just as we start wars to end all wars.
Hindsight, the ability to explain the past, gives us the illusion that the world is understandable.
- The illusion of control is more persuasive than the reality of uncertainty.
- So we end up clinging to the stories of outcome being in our control.
When planning we focus on what we want to do and can do, neglecting the plans and skills of others whose decisions might affect our outcomes.
- We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs.
- Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck.

All Together Now¶

Respect the power of luck and risk and you’ll have a better chance of focusing on things you can actually control.
Saving money is the gap between your ego and your income, and wealth is what you don’t see.
the foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions.
Judging how you’ve done by focusing on individual investments makes winners look more brilliant than they were, and losers appear more regrettable than they should.
- Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness.
Save. Just save. You don’t need a specific reason to save.

Confessions from the Author¶

important financial decisions are not made in spreadsheets or in textbooks. They are made at the dinner table.
Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals.
Achieving some level of independence does not rely on earning a doctor’s income. It’s mostly a matter of keeping your expectations in check and living below your means.
All lifestyles exist on a spectrum, and what is decent to one person can feel like royalty or poverty to another.
Independence is our top goal.
- A secondary benefit of maintaining a lifestyle below what you can afford is avoiding the psychological treadmill of keeping up with someone else's lifestyle.
“True success is exiting some rat race to modulate one’s activities for peace of mind.”
Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.”
“The first rule of compounding is to never interrupt it unnecessarily.” Remember,

“History is just one damn thing after another.”

Some good quotes from AFTERword¶

"Everything in finance is data within the context of expectations."

"“The more the Internet exposes people to new points of view, the angrier people get that different views exist.”"

"Economics is the story of cycles."

My thoughts about this book¶

Yes I have decided to add this for the book reviews from this point onwards, what even is the point of summarizing the book if it doesn't have my bias, emotions and thoughts with it?
I think the book is good, and reading it a month before going to start a new life where I live by myself alone in Hyderabad would turn out to be beneficial.
Some of the key takeaways for me from this book would be:
1. Save more, invest more, have a fallback fund so you don't have to break your investments
2. Let the compounding do its job, don't be too hasty, don't be too scared.
3. Don't invest everything
4. Invest in different places, diversify
5. Limit your spendings, live a modest life not a lavish one.
6. The goal is not to look rich and be rich, but to look modest and be wealthy.

frugality - the quality of being economical with money or food; thriftiness. leverage - use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.