The Psychology of Money


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Notes

  • Investing is not the study of finance. It’s the study of how people behave with money. And behavior is hard to teach, even to really smart people. You can’t sum up behavior with formulas to memorize or spreadsheet models to follow. Behavior is inborn, varies by person, is hard to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.
  • 1. Earned success and deserved failure fallacy: a tendency to underestimate the role of luck and risk, and a failure to recognize that luck and risk are different sides of the same coin.
    • I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.
  • 2. Cost avoidance syndrome: A failure to identify the true costs of a situation, with too much emphasis on financial costs while ignoring the emotional price that must be paid to win a reward.
    • e.g. Discount Factor in game theory
    • Scott Adams: One of the best pieces of advice I’ve ever heard goes something like this: If you want success, figure out the price, then pay it. It sounds trivial and obvious, but if you unpack the idea it has extraordinary power.
  • 3. Rich man in the car paradox
    • The person with the nice car is less rich for having bought it!
      • Wealth is what you don’t see.
    • Don’t conflate the possession with the person
  • 4. A tendency to adjust to current circumstances in a way that makes forecasting your future desires and actions difficult, resulting in the inability to capture long-term compounding rewards that come from current decisions.
    • First rule of compounding: Never interrupt it unnecessarily.
    • Balance is a good policy when there is so much change happening
  • 5. Anchored-to-your-own-history bias: your personal experiences make up maybe 0.00000000000001% of what’s happened in the world but maybe 80% of how you think the world works.
    • YES YES YES
    • If you grew up in the 50s and 60s, you have a completely different impression of the stock market than if you were born in 1970. But the overall trend has been the same!!
    • This will make the behavior of other people make much more sense. If you can control for it there are lots of opportunities for you.
  • **6. Historians are Prophets fallacy: Not seeing the irony that history is the study of surprises and changes while using it as a guide to the future. An overreliance on past data as a signal to future conditions in a field where innovation and change is the lifeblood of progress.
    • Don’t over-admire people who have been there, done that when it comes to money. Things will change from when they had their success.
  • 7. The seduction of pessimism in a world where optimism is the most reasonable stance.
    • “If it bleeds it leads” leads to overall sadness
    • Far more reasons to be optimistic!
  • Linear thinking is so much more intuitive than exponential thinking. […] If I ask you to calculate 8 + 8… + 8 in your head, it’s 72. If I ask you to calculate 89, your head explodes (it’s 134,217,728). **COMPOUND INTEREST IS FANATASTIC.
  • **Real contrarianism is when your views are so uncomfortable and belittled that they cause you to second guess whether they’re right. Very few people can do that. But of course that’s the case. Most people can’t be contrarian, by definition. Embrace with both hands that, statistically, you are one of those people.
  • Boredom: The purpose of investing is to maximize returns, not minimize boredom. Boring is perfectly fine. Boring is good. If you want to frame this as a strategy, remind yourself: opportunity lives where others aren’t, and others tend to stay away from what’s boring.