By Morgan Housel | Full Article | 1250 words | Apr 17, 2018
3 minute read
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
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
“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