The Psychology of Money

I read this book as I want/need to be better at handling money.

Chapter 1 - No One's Crazy

I've seen the same sentiment in The Problems of Philosophy, the only thing that I can be certain about the world is myself. Even then, I don't exactly know what 'self' is.

Everyone has their own unique experience due to different upbringing, different environment, different timeline. It's hard to imagine the thoughts, values and beliefs other people have. I can read about the history of the Great Depression but I will never have the emotional scars of those who experienced it firsthand.

Personal experience defines and shapes one's risk tolerance. In another word, it is just luck of when and where you were born.

If I lived paycheck to paycheck, it would be reasonable to buy lottery tickets as they seem like the only option to get me out of the poverty.

Chapter 2 - Luck & Risk

Every outcome is determined by luck in additional to the individual action. It's difficult to identify how much of an outcome is attributed to either luck and skill.

Risk and luck are doppelgangers.

Chapter 3 - Never Enough

  • The hardest financial skill is getting the goalpost to stop moving.
  • Comparison, ego is the killer of joy.
  • Enough is not too little
  • There are many things not worth risking

Chapter 4 - Confounding compounding

Ah, compounding interest, I read Economics at university so I'm familiar with the concept. However, it took me a long time before I started investing seriously in low cost index funds.

Consistent small increase over time will create a tremendous result.

Chapter 5 - Getting Wealthy vs Staying Wealthy

To stay wealthy, one needs to be frugal and not consistently screw up.

Survival mindset:

  • I need to survive long enough for compounding to work its wonders. It's all about growth amid loss.
  • Plan on the plan not going as planned. Always have room for error (a frugal budget, flexible thinking, a loose timeline).
  • Hope for the best, prepare for the worst.

Chapter 6 - Tails, You Win

Long tails, a few events can contribute to the majority of outcomes. Most of an index fund's returns can come from a small amount of companies.

You can be wrong half of the time and still make a fortune. It isn't whether you're right or wrong, but how much you make when you're right and how much you lose when you're wrong.

Chapter 7 - Freedom

Wealth is the freedom to do what you want, with who you care about every day.

Control over time has diminished compared to previous generations. Knowledge workers whose job is to think, have their mind occupied with work even when they are out of office.

Chapter 8 - Man in the Car Paradox

When I see a sport car, I admire the car without paying attention to the driver.

Chapter 9 - Wealth is What You Don't See

I can't see other people's bank accounts or brokerage statements, so I judge their wealth by their outer appearances (cars, houses, Instagram...). Their possessions could be rented or bought with debt, hence what I can see isn't a good indicator of how wealthy others are.

Wealth is financial assets that haven't been converted into tangible stuff. I need the restraint to be wealthy, to save money today so I have an option to purchase more tomorrow. That doesn't mean I need to spend money tomorrow, it just means that I have the choice to do so.

Chapter 10 - Save Money

In order to build wealth, I need to save money (spend less than I earn and invest).

The value of wealth is relative to what I need. If I need to spend more to be happy, I'll have a lower saving rate, and it takes longer to retire, ceteris paribus. If I'm content with lower spending, I can save more and I've more time to enjoy my retirement.

Savings without a spending goal gives me options and flexibility.

Chapter 11 - Reasonable > Rational

I'm a screwed up, emotional person. Reasonable is more realistic and I have more chance of sticking with it for the long run, than being rational.

Chapter 12 - Surprise

Things that have never happened before happen all the time.

Over reliance on history to predict the future:

  • You'll likely miss the outlier events that move the needle the most.
  • History can be a misleading guide to the future because it doesn't account for structural changes in today's world.

The correct lesson to learn from surprises is that the world is surprising. I should use the past surprises as an admission that I have no idea what might happen next.

Chapter 13 - Room For Error

Acknowledge that uncertainty, randomness, and chance are parts of life. The purpose of the margin of safety is to render the forecast unnecessary.

I have to survive to succeed.

Avoid single points of failure. An example is sole reliance on a paycheck to pay short term expenses, without any saving.

Saving without any reason is important as it gives me flexibility in the face of unpredictable events.

Chapter 14 - You'll Change

I don't know today what I will even want in the future.

Avoid extreme ends of the financial planning. Aim for moderate income, moderate saving, moderate free time... helps to increase the odds of sticking with a plan and reduce regrets.

Sunk costs make our future selves prisoners to our past, different selves.

Chapter 15 - Nothing's Free

Everything has a price, I need to figure out what the price is and whether I'm willing to pay. The problem is the price isn't oblivious until I've experienced it firsthand.

Most things are harder in practice than they are in theory. This is because I'm not good at identifying the actual price of success.

Chapter 16 - You & Me

Other investors have different goals than me. Day traders care a lot about the momentum (daily price change) than the actual share price whereas long term investors care about the share price in the long run. We are playing different games with different rules.

I need to identify the game I'm playing. If I'm a passive investor and my time horizon is 30 years, it doesn't matter if there is a recession next year.

Chapter 17 - Seduction of Pessimism

Pessimists often extrapolate present trends without accounting for how the markets adapt.

Perfect and awful circumstances rarely stay that way for long because supply and demand adapt to the new environment.

Progress happens too slowly to notice, but setbacks happen too quick to ignore.

Chapter 18 - When You'll Believe Anything

The more I want something to be true, the more I want to believe in a story that overestimates the odds of it being true. There are many things that I think are true because I desperately want them to be true.

Everyone has an incomplete view of the world, but we form a complete narrative to fill in the gaps.

Hindsight, the ability to explain the past, gives us the illusion that the world is understandable. It makes us think that the world makes sense, even when it doesn't make sense.

We need to believe that we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.

Chapter 19 - All Together Now

In summary:

  • Find humility when things go well and compassion when they go wrong, because it is never as good or as bad as it seems.
  • Less ego, more wealth.
  • Manage your money in a way that you can sleep well at night.
  • Increase your time horizon as it makes little things grow big and big mistakes fade away.
  • Be OK with a lot of things go wrong. I can be wrong half of the time and still make a fortune.
  • Use money to gain a control over time.
  • Be nicer and less flashy.
  • Don't need a reason to save.
  • Define the cost of success and be ready to pay it.
  • Have room for error.
  • Avoid extreme ends of financial decisions.
  • Define the game I'm playing.