The Psychology of Money
Morgan Housel teaches you how to improve your connection with money and to make wiser financial decisions in The Psychology of Money.
Our lives are significantly impacted by our finances. But people hardly ever talk about them or educate themselves on the topic. Due to this, several misconceptions and presumptions around money have developed over time. People mistakenly believe that wealth is mainly based on luck. They also believe that rich people all inherited their fortune.
1. No One’s Crazy
If you haven’t experienced a financial crisis, it is difficult to understand why people are hesitant to invest in the stock market. Even if you read about what it was like to lose everything during a crisis like The Great Recession, you will never experience the emotional scars that those who survived it experienced. The fact that no amount of education or open-mindedness can totally eliminate feelings of fear and doubt is a challenge that provides us. Each person views money through the window of their previous experiences.
2. Luck and Risk
In the world of money, luck and risk coexist. Bill Gates had an advantage over millions of other students as he went to one of the few high schools in the entire world with the resources and foresight to purchase a computer. Other than personal effort, forces guide every outcome in life.
3. Not Enough
Don’t become too attached to anything, even success, fame, or similar things. Here, social comparison is the major issue. Many things are not worth taking a risk on. In such circumstances, the potential gain is irrelevant.
4. Compounding wins
Compounding produces results that contradict logic, yet our minds are not created to deal with this.
The Ice Age has shown us that extraordinary outcomes may be attained without extraordinary strength. When summer cannot warm up sufficiently to melt the month of the previous winter, an ice age begins. More sunlight is reflected by continuous snow, which increases the amount of snow. A seasonal snowfall develops into a vast continental ice sheet over a few hundred years.
5. Getting Wealthy vs. Staying Wealthy
Risk-taking is necessary to earn money, but it is also necessary to avoid risk if you want to maintain your money. According to Housel, the key to financial success can be summed up in the word “survival.” No, “growth.” When it comes to making money, the main difference is having the endurance to stick for a period of time without having to give up. Making wise decisions is not necessary for excellent investing. It involves consistently not making mistakes.
6. How to succeed
Even if you’re partially correct, it’s still possible to succeed financially. Things that are huge, successful, well-known, or important tend to capture almost most of the attention. Any enormous event is the outcome of a tail event, a rare one in a million or thousands of million emergencies. How rare and powerful these tail occurrences are is often understated.
7. Freedom
The biggest return on investment is time management. Being able to say when you wake up each morning, “I can do anything I want, anytime I want,” is the ultimate form of wealth. This goes beyond your salary, the number of hours you work, or the status of your position. This is the highest dividend money can buy, bar none.
8. Man in the Car Paradox
People frequently desire wealth as a sign to others that they desire to respect and admiration. But in truth, those other people frequently pass over appreciating you because they use your wealth as a benchmark for their own desire to be liked and loved. This isn’t because they don’t think wealth is admirable. Nobody is as astonished by your things as you are.
9. What You Don’t See is Wealth.
We often assess wealth based on what we see, although money is practically invisible. A current income is rich. Financial resources are wealth if they haven’t yet been converted into the things you can see. Many poor financial decisions are the result of a misunderstanding of the differences.
10. Save Money
Building wealth is more affected by your savings rate than it is by your income or investment returns. While it is possible to accumulate wealth without a high income, this is unlikely without a high savings rate. All that remains after you spend what you bring in is wealth. One of the single most important things is produced by the one aspect that you have influence over.
Saving without a goal, go here to read more…
11. Reasonable > Rational
The chances of success are extremely against day trading and selecting independent stocks, which is not practical for most investors. However, both are acceptable in small sums provided your other, more diversified assets are unaffected.
12. Surprise
The past serves as a reliable guide for the future. You will overlook the most important outliers if you depend too much on investing history. The past may not accurately predict the direction of the economy. The likelihood that you are looking at a reality that no longer applies today increases as you go further back.
13. Room for Error
When calculating your future returns, allow for errors. Housel expects that the lifetime returns on his personal investments will be 1/3 less than the historical norm. Thus, he saves more money than he would have if I had believed that the future will be like the past. He uses it as a safety margin.
14. You are different from who you are today in the future
We’re aware of how much we’ve changed in the past, but grossly underestimate how much our personalities, desires, and goal will change in the future. When you’re making long-term decisions, remember to avoid the extreme ends of financial planning and accept the reality of changing your mind. People’s objectives and preferences change throughout time, making long-term planning more difficult than it first appears.
15. Nothing’s Free
Everything has a cost, and the secret to accomplishing most financial goals is simply knowing what that cost is and being prepared to pay it. Success in investing has a price that is not immediately evident. Since there isn’t a visible price tag, it doesn’t feel like a cost for receiving something worthwhile when the bill is due. It appears to be a fine for doing something incorrectly.
16. You & Me
It’s challenging to comprehend that other investors have goals that differ from our own. We are unable to understand that logical people can view the world from a perspective completely different from our own due to a mental fault.
17. The Seduction of Pessimism
Pessimism is more compelling in the world of finance because it receives more attention than optimism. True financial optimism, according to Housel, is expecting the worse and being pleasantly delighted when it doesn’t happen. In his book, he states that “Optimistic narratives require looking at a long stretch of history and developments.”
18. When You’ll Believe Anything
You are more inclined to trust a story that exaggerates the likelihood of something being true the more you want it to be true. According to Housel, there are several things in life that we believe to be true because we truly hope they are. These things, which he refers to as “appealing fictions,” greatly influence the way we think about money, especially investments, and the economy.
Key Takeaways from The Psychology of Money…
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