Psychology of Money

People have a bad relationship with money because always on a hamster wheel of trying to get ahead. what works for us are often not that intuitive.

10 points from the book that are important to build relationship with money

  1. Never enough. when rich people do stupid things

Joseph Heller author of Catch 22. dinner party at hedge fund manager's house. someone told him the hedge fund.

understanding hte idea of enough is one of the most important stories. BErnie Madoff - one of the most notorious financial criminals of all time. before he started his ponzie scheme he had a legit business on wall street - making up $50mn per year. he thought that wasn't enough to such an extent he started a ponzi scheme.

the best amount of money is more than you have right now. that is akwats going to lead to development. the hardet and most important fin skill is to get the goalpost to stop moving.

somebody will always be gtting richer than you - that's okay. if your measure of wellbeing is relative to them, you're never going to win the 'race'.

2. getting rich vs staying rich

wealth not necessarily abotu making good deciosn, its bout consistently not screwing up. getting rich means to work hard, taking chances. staying rich is exact oppo - pessimism, conservatism, paraanoia so you can stick around through all the ups and downs

  • save like a pessimit (prepare for unpredictable stuff in life), invest like optimist (with a liong term mindset, optimistic of peplel's ability to solve problems)
  • compound interest is dirven by time, tand time requires endurance. people who've been most successful at investing have been doing it for a long time.
  • avg returns for an above avg period of time leads to above-avg results. you can make avg decisions, but if you do it ofr an above avg period of time, you will do well

3. wealth is what you dont see. spending money to show oeple how much money you have is the fastest way to have less money.

wealth is the money you didnt spend on luxury. moneythat you saved. not intuitive because what you spend is all other people see.

  • when most people say they want to be a millionaire what they really mean is they want to spend a million dollars. the truth is the opp
  • rishabba's financial wisdown - she almost went bankrupt 10 years ago. she sued her financial advisor. advisory said in court: did i need to tell her that if you spend money on things, you end up with things and not money
  • be careful who you admiore becase you cant see their bank account.

4. what's the point of havin welath if you dont spend it? freedom. controlling your time is the highest dividen money pays.

common denominator that made eople ahppy -was whether they ahd control of their time. can do whatever you want. to be able to wake up and say i can do whatever i want today. if you want to go to work, its on your own terms - you;re going to be happier. havign a bit of saving means you have control of your time - you can take a bit longer to find a job, you can live closer to work so you spend less time commuting.

  • the ability to wak up every morning and say i can do wahtever i want today is the highest form of wealth. taleb: my only measure of success is how much time i have to kioll
  • independence means you have options to do the work you want
  • every dollar of saving is a piece of your future that you own. vs debt 0s piece of future that someone else owns.

5. man in teh car paradox. no one is impressed with your posessions as much as you are

  • easy to overestimate how much admiration you get. no oen thinks about your stuff as much as you do
  • what people admire is humility, generosity, friendship
  • upside of having ncie stuff is always less than we think it will be

6. reasonable > rational

goal is to ahve a better life, not to make spreadsheets happy

  • fevers are good at curing illness. but nobody wants a fever, even though its helpful thing. something you want to get rid of. becasue fevers aren't fun. having a fever is rational, but not reasonable
  • people dont make financial decision on a spradsheet, they make them at the dinner table
  • we should keep in mind that the goal of wealth is to have a better life
  • money is not math - in the real world its psychology thats hard to measure
  • you dont need other people's permission - do what works for you

7. nothing's free - everything has a price, but nto all prices appear on labels

  • 'every job looks easy when you're not the one doing it'. when you're an outsider, its not obvious to see what the cost is. everything worthwhile has a price. but prices are often not obvious
  • stock market - you can earn a lot of money over time, but its not free. there's a price for that. the price is putting up with uncertainty and volatility. if stock market dalls, doesnt mean you did something wrong
    • true for career as well - you want high income, there's a price fr thatas well
    • fee vs fine - fine is whe you did soemthng worng. fee is just paying cost of admission. stock market volatility is a fee. undersand the fee - find the price and be willing to pay for it.

8. you and me - beware of taking financial cues from people that areplaying different games than yo uare. no one should pretend my financia goals shoud be same as yours, or that my financial decisions should be same as hyours. its not one game with one set of rules. equally smart people can come up with different ways to invest and what to do with money.

  • most investors get tripped up when they take advice from others who are playing a diff gam
  • figure out what game you'e aplying. go out of the way to figure out what game you're playing
  • judge less. atlast half the people doing things with money that you disgee with are playing a differen game than you area. you probably look just as crazy in their eyes.
  • there isnt one right ansser - figure out what works for you

9. surprose and room for error

plan on your plan not going according to your plan

risk is what no one is talking about. carl richards - risk is whts left over when you think you've thought of everything. economists spent last decade debating what;s teh bgigest risk to the world is. in hidsight none o the thing we talked about were the biggest risks - it was a virus that no one was talking about. if no one sees it coming, no one prepares for it and it has the biggest impact.

  • earthquakes - you know its goingto happen but dont know when. rather than forecasting, you're alwasy preared for one to happen at any figen moment. think about financial risk the same way. you cant forecast catastrophe
  • what are you saving for? for an unpredictable workd because you dont know what soing to happen next

10. no one is crazy. your personal exerinece with money make up 0.001% of whats happend i nteh world, but 80% of how you think the world works

Kahneman: no one is more pessimistic on the outlook of humantiy than i am. he said im a pessimist bcause i grew up in nazi occupied france. thats not the expereinece i've had. we all anchor to our unique life circumstances. youve seen a didfferent view of the world, so the model in your head is different. if you didnt experience it yourself, you dont have the emotional scar tissue - we have very different views. our view of risk and opportunity differs

  • open your mind and talk to epopel from diff generaitons, countries, economic backgrounds, emotional stats than your own - you realise there's a much wider range of outcoms that might happen to you
  • personal fiancneis more persnonal than it is finance

What have you experineed in life hat influences the way yo uthin kabout money? those experiences probably ahve an outiszes inmpact on how you think about money and realise that there's orobably other possibilities

whose life do you truly admire and how does money ply a role in their happeniess

hwat is the cot of your financial goals (social, tiome stress) if not aware of teh cost, will be disappointed with teh goals

what will your regret at the end fo your life

even though income has risen, spending hasnt. if you get windfall, dont increase spending by same amount. get off the hamster wheel

if you do work because you like to do it, you'll probably do a better job. a lot of pepole get better at their job when they get financial independent. a lot of peple dont see that coming.

how do you bring up a sensitive topic with people who are struggling with money?

  • health and money are twothings everyone has an obligation in life to ahve a basic understanding of how these work - they imact everyone.
  • talk about it without shame, without any form of competition. use money as a tool to have a better life
  • if you can talk about money one on one with them, rather than in a gorup situation
  • once you ahve your spending laid out, you can gain a lot of insights

Grace Grawner? ordinary life (secretary all her life) but left 7million to charity. invested her savings in stock market and left it for 80 years

good investing is not about how much you know, how sophisticated your models are. its about your relationshpi with greed and fear, and ability to take long temr mindset - its behavioural skills. it tends to get ignpred in investing because its a softer mushier topic. its not about charts and formulas. the only way to wrap our heads around it is through stories.

Four stories:

  1. Timing is meaningless, time is everything.

Day of the wright brothers first flight - no mention in headlines for that day or next few days. went on for years. 2 years after they first flew - did an interview wiht a german tycoon - he said there arent any flying machines now. no one was paying attention to the wright brothers. the only local journalist who covered it did it out of sympathy for them.

We rarely think of patience as a competitive advantage and when we do we massively underestimate time.

Long term investing - good definition is between 10 and 20 years - this time period puts the odds of success in your favour.

compounding plays a key role. 99% of wrren buffet's net worth came after his 50th birthday. reason he's successful is that he's been investing for 70 years.

The central problem investors have with stocks is underestimating the amountof time neded to put odds of long term success in their favour. the single most important thing you can do is to invest over a long time

2. Risk is what you don't see.

Harry Houdini's death - died because of a kid punching him to a stomach.

How risky something is depends on whether you are prepared for it - whether it's a surprise, and whether you see it coming.

Biggest investing risk is what no one's talking about. if no one talking about it - no one is preapred for it and damage will be amplified.

Risks people talk about - trade wars, quarter earnings, budfet deficit forecasts, elections. these are not surprises - we can see them coming.

Real risks - covid, lehman brothers coudlnt find a buyer, 9/11, Pearl Harbour - these are the things that moved the needed. the common denominator wbetween them is that they are surprises - no one is talking about them until it came. this will always be the case.

Two things to help understand this reality:

  • think of risk they way cali thinks of earthquakes - have expectations instead of forecasts. you cant forecast next quake, but know that it's going to happen. they are always preared for one ot occur at any moment. think abotu risk in economy the same way. receission in aug 2022 vs knowing that historicall a recession has happened evert decade
  • getting rich vs staying rich

3. you can be wrong half the time and still do great

growth of a new born baby's brain. avg child born with 100 bn neurons. in 6 months, increases from 3009 synaptic connectiosn to 6000. by 2 years, goes to 10,000 connections. after 2 years, the number of synaptic connectiosn starts to decline rapidly - at 4 years, lose one fifth of the connections. at 6, lost third of what they had at two years old. by 25, lost half of synaptic connection density compared to 2 years old

a lot of the learning that takes place are redundant, not useful. sometimes they are miswired. go through early years, shedding the inefficient unnecessary connections. even though there is loss and destruction inside brain, you're growing smarter. this is not very intuitive

if a parent could look inside a child's brain everyt morning, they would panic.

idea that soemthing could improve even though there is loss inside - we see this is investing.

Stock market index performance vs individual company performance in the index. 7% of companies account for all the returns in the Russell 3000 index for eg.

Netflix stocks - not intuitive to think that on the way to earning 500 times your money, you're going to lose 70% of your money twice.

The man who could do the average thing when everyone ele islosing his mind - Eisenhower

Good investing is about consistnently not making mistakes - not about making great decisions

The first rule of compiound interest is tnever interrupt it unnecessarilry - Munger

4. There are no points awarded for difficulty

Cancer research in the US - early 1970s lot of investment - "war on cancer". shifted focus to prevention (couldnt treat it). despite knowing that prevention is important, hard to get doctors to take it seriosuly compared to treatment. more difficult to get funding.

"If you dont get cancer you're not going to die from it. That is a simple truth that we overlook because it's intellecturally not very stimulating"

how to suceed at investing: spend less money than you make, save teh differense, buy a diverse portfolio, be patient.

diet and exercise mroe effectiev than stem cell therapy at cancer treatment

Warren Buffet has a "too hard" bin on his desk vs Lehman Brothers people had eight monitors at a desk before they went bankrupt.

people dont want to beleive that simple things can have the biggest impact.

"most people beleive you cant be an expert if its too simple" - Munger.

Take a simple idea and take it seriously.

it doesnt have to be more complicated.

What has the pandemic taught us about the psychology of money?

Morgan: battle of stalingrad in WW2. mice chewed through wires of tanks. they thought about all kinds of risks, no general is thinking of mice. took out an entire division of tanks.

Hold a broadbased index fund or 10, 20 or 40 different stocks - odds of success are higher than holding just a couple of companies, over a longer period of time.

You can be a successful investor wihtout understanding company fundamentals if you hold a diversiied portfolio. you;'re betting on teh success of capitalism and humanity. if you;re going to be picking stocks, understading fundemantals is important.

some of the best investors are intentionally slow moving. it's like gardening.