The Psychology of Money
A Genius who loses control of their emotions can be a financial disaster. The opposite can also be true. Ordinary folk with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with the formal measures of intelligence.
Engineers can determine the cause of bridge collapse because there's an arrangement that if a certain amount of force is applied to a certain area, that is will break. physics isn't controversial. It's guided by the laws. Finance is different. It's guided by people's behaviors. And how I behave might make sense to me but look crazy to you.
No One's Crazy
Your personal experiences with money make up maybe 0.00000001% of what's happened in the world, but maybe 80% of how you think the world works.
The economists wrote: "Our findings suggest the individual investor's willingness to bear risk depends on personal history."
Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.
Few people make financial decisions purely with spreadsheets. They make them at the dinner table, or in a company meeting. Places where personal history, your own unique view of the world, ego pride, marketing, and odd incentives are scrambled together into a narrative that works for you.
We all do crazy stuff with money because we're all relatively new in this game and what it looks crazy to you might make sense to me. But no one is crazy-we all make decisions based on our own experiences that seem to make sense to us in a given moment.
Luck and Risk
Nothing is as good or as bad as it seems.
Luck and risk are siblings. They are both the reality that every outcome in life is guided by the force of other than individual others.
Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can't believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in-game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.
Say I buy a stock, and five years later it's gone nowhere. It's possible that I made a bad decision by buying it in the first place. It's also possible that I made a good decision that had an 80% chance that making money, and I just happened to end up on the side of the unfortunate 20%. How do I know which is which? Did I make a mistake, did I just experience the reality of risk?
After spending year around investors and business leaders I've come to realize that someone else's failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of the risk. When judging your failures I'm likely to prefer a clean and simple story of cause and effect, because I don't know what's going on inside your head. "You had a bad outcome so it must have been caused by a bad decision" is the story that makes the most sense to me. But when judging myself I can make up a wild narrative justifying my past decision and attributing bad outcomes to risk.
Be careful who you praise and admire. Be careful who you look down upon and wish to avoid to becoming.
Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But I realize that not all success is due to hard work, and not all poverty is due to laziness. Keep in mind when judging, including yourself.
Never Enough
You need to know how much money you need to earn how much is ENOUGH for you.
A Nigerian scam artist once told The New York Times that he was left guilty for hurting others, but "poverty will not make you feel the pain."
Once Warren Buffet said:
To make money that didn't have and didn't need, they risked what they did have and did need. And that's foolish. It is just plain foolish. If your risk something that is important to you for something that is unimportant to you it does not make any sense.
A friend of mine makes an annual pilgrimage to Las Vegas. One year he asked a dealer: What games do you play, and what casinos do you play in? The dealer stone-cold replied: "The only way to win in a Las Vegas casino is to exit as soon as you enter."
The only way to know how much food you can eat is to until you're sick. Few try this because vomiting hurts more than any meal is good. For some reason, the same logic doesn't translate to business and investing, and many will only stop reaching for more they break and are forced to.
Confounding Compounding
If something compounds-if a little growth serves as a fuel for the future growth-a small starting base can lead to results extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what's possible, where growth comes from, and what can lead to.
More than 2000 books are dedicated to how Warren Buffet built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffet's most fortune isn't due to just being an investor, but being a good investor literally a child.
His skill investing, but his secret is time.
Good investing isn't necessarily about earning the highest returns because the highest returns tend to be one-off hits that can't be prepared. It's about earning pretty good returns that you can stick to and which can be repeated for the longest period of time. That's when compounding run wild.
Getting wealthy vs. staying wealthy
Good investing is not necessarily about making good decision. It's about consistently not screwing up.
Capitalism is hard. But part of the reason this happens is that getting money and keeping money are two different skills.
Compounding only works if you can give an asset years and years to grow. It's like planting oak trees: A year of growth will never show much progress, 10 Years can make meaningful differences, and 50 years can create something absolutely extraordinary.
A plan is only useful if it can survive reality. And a future filled with a unknowns is everyone's reality.
Tails, You win
You can be wrong half the time and still make a fortune.
It is not intuitive that an investor can be wrong half the time and still make fortune. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact they do.
Anything that is huge, profitable, famous, or influential is the result of a tail event-an outlying one-in-thousands or millions event. And most of our attention goes to things that is huge, profitable, famous, or influential.
When most of what we pay attention to is the result of the tail, it's easy to underestimate how rare and powerful they are.
A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.
When we pay special attention to role model's success we overlook that their gains came from a small percent of their actions. That makes our own failures, losses, and setbacks feel like we're doing something wrong. But it's possible we are wrong, or just sort of right, just as often as their masters are. They may have been more right when they were right, but they could have been wrong just as often as you.
Freedom
People want to become wealthier to make themselves happier. Happiness is a complicated subject because everyone's different. But if there's a common denominator in happiness-a universal fuel of joy-is that people want to control their lives.
The hardest thing about this was that I loved the work. And I wanted to work hard. But doing something you love on a schedule you can't control can feel the same as doing something you hate.
Man in the car paradox
When you see someone driving a nice car, you can 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.
There's is a paradox here: people tend to want wealth to signal to others that they so 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 like and admired.
Wealth is what you don't see
Spending money to show people how much money do you have is the fastest way to have less money.
We tend to wealth by what we see, because that's the information we have in front of us. We can't see people's bank account or brokerage statements. So we rely on outward appearances to gauge financial success. Cars, Homes, Instagram photos.
You can laugh, and please do. But the answer is, yes people do need to be told that. 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 of th being millionaire.
Exercise is like being rich. You think, "I did the work and now I deserve to treat myself to a big meal". Wealth is turning down the treat meal and actually burning net calories. It's hard and requires self-control. But it creates a gap between what you could do and what you choose to do that occurs over time.
Reasonable>Rational
Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run. Which is what matters most when managing money.
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 a thing providing the endurance necessary to put the quantifiable odds of success in your favor, you realize it should be the most important partany financial strategy.
There is a well-documented "home bias" Where people prefer to invest in companies from the country they live in while ignoring the other 90% of the planet. It's not rational until you consider that investing is effectively giving money to strangers.
Surprise
Investing is not hard science. It's a massive group of people making imperfect decisions with limited information about the things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy, and paranoid.
History can be a misleading guide to the future of the economy and stock market because it doesn't account for structural changes that are relevant to today's world.
The problem is that we often use events like the great depression and World War 2 to guide views of things like worst-case scenarios when thinking about future investment returns. But those record-setting events had no precedent when they occurred.
The four most dangerous words in the are, "it's different this time."
Specific trades, specific casual relationships about markets, and what people should do with their money are always an example of evolution in progress.
Room for error
The most important part of every plan is planning on your plan not going to accroding to plan.
History is littered with good ideas taken too far, which are indistinguishable from ba ideas. the wisdom in having room for error is acknowledging that uncertainty, randomness, and a chance-"unknowns"_are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen can happen while still leaving you capable of fighting another day.
Two things cause us to avoid room for error. One is the idea that somebody must know what the future holds, driven by the uncomfortable feeling that comes from admitting the opposite. The second is you are therefore doing yourself harm by not taking actions that sully exploit an accurate view of that future coming true.
A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days of the catastrophe. That's a single point of failure.
You'll change
Long term plannig is harder than it seems because people's goals and desires change over time.
Long-term financial planning is essential. But things change-both the world around you, and your own goals and desires. It is one thing to say, "We don't know what the future holds." It is another way to admit that you, yourself, don't know today what you will even want in the future. And the truth is few of us do.
We should avoid the extreme ends of financial planning. Assuming you'll be happy with very low income, or choosing to work endless hours in pursuit of a high one, increase the odds that you'll find yourself at a point of regret.
We should also come to accept the reality of changing our minds. Some of the most miserable workers I've met are people who stay loyal to a career only because it's the field they picked when deciding on a college major at the of 18
Nothing is free
Everything has a price , but not all prices appear on labels.
Ever jobs looks easy when you are not doing it.
The price of investing success is not immediately obvious. It's not a price tag you can see, so when the bill comes due it doesn't feel like a fee for getting something good. It feels like a fine for doing something wrong. And while people are generally fine with paying those fees, fines are supposed to be avoided, You are supposed to make decisions to preempt and avoid fines. The natural response for anyone who watches their wealth decline and views that drops as fine is to avoid future fines.
The seduction of pessimism
I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of person as a sage.
Progress happens too slowly to notice, but setbacks happen too quickly to ignore.
A lots of overnight tragedies, there are rarely overnight miracle.
Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure which happens in seconds, and loss of confidence, which happens in an instant.
Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces the expectations, narrowing the gap between possible outcomes and outcomes you feel great about./
When you'll believe anything
Hindsight, the ability to explain the past, gives us the illusion that the world is understandable. It gives that the illusion that the world makes sense, even when it doesn't make sense. That's big deal in producing mistakes in many fields.
We need to believe in we live in a predictable, controllable qorld so we turn to authoritive-sounding people who promise to satisfy that need.
The one who is confident he knows what's happening based on what he sees but turns out to be completely wrong because he can't know the stories going on inside everyone's else's head?
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