The Psychology of Money Notes

Doing well with money isn't necessarily about intelligence; behavior matters more.
Even individuals with no formal financial education can become wealthy through behavioral skills.
Two key figures: Ronald Read (janitor/investor) and Richard Fuscone (Harvard-educated executive).
Financial success is a soft skill; psychology of money.
Finance often emphasizes math, neglecting the psychological aspect.
Understanding the psychology of money helps explain why people behave the way they do.
Financial crisis: difficult to explain accurately due to human behavior.
History doesn't repeat, but man always does (Voltaire).
Book's goal: Explore flaws, biases, and causes of bad behavior when dealing with money.
Each chapter is independent, focusing on essential features of the psychology of money.

People's experiences with money shape their views.
Views on money works very differently based on someone's history.
Challenge: Recreating power of fear and uncertainty.
Cannot model feeling of coming home, looking at your kids, and wondering if you’ve made a mistake that will impact their lives.
Some lessons have to be experienced before they can be understood.
People’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation— especially experiences early in their adult life.
Financial decisions: influenced by personal history, ego, pride, marketing.
Modern foundation of saving and investing is relatively new.

Luck and risk: every outcome in life is guided by forces other than individual effort.
Nothing is as good or as bad as it seems. (Scott Galloway)
Luck and Risk are siblings
Financial success: never as good or as bad as it seems.
Risk: just what happens when you end up on the unfortunate side of that equation.
Emulate broad patterns of success and failure.
The line between bold and reckless can be thin.
Risk and luck are doppelgangers.

Having “enough”.
Danger of insatiable appetite for more leads to regret.
Getting the goalpost to stop moving.
Social comparison is a problem.
Enough is not too little. The inability to deny a potential dollar will eventually catch up to you.
Things that are never worth risking such as reputation, freedom and independence, family and friends, being loved, happiness.

Warren Buffett's wealth: compounded over a long period.
$81.5$ billion of Warren Buffett's $84.5$ billion net worth came after his 65th birthday.
$A = P(1 + r/n)^{nt}$ Equation of compound interest with:
- $A$ = the future value of the investment/loan, including interest
- $P$ = the principal investment amount (the initial deposit or loan amount)
- $r$ = the annual interest rate (as a decimal)
- $n$ = the number of times that interest is compounded per year
- $t$ = the number of years the money is invested or borrowed for
Linear vs. exponential thinking.
Hard to wrap your head around LaTex math because it’s not intuitive.
Good investing: Earning pretty good returns that you can stick with.

There are a million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.
Survival is key with money.
Compounding only works if you can give an asset years and years to grow.
There are two reasons why a survival mentality is so key with money.
More than I want big returns, I want to be financially unbreakable.
A plan is only useful if it can survive reality.
A mindset that can be paranoid and optimistic at the same time is hard to maintain.

Investor can be wrong half the time and make a fortune.
Long tails have tremendous influence in finance, where a small number of events can account for the majority of outcomes.
99% of the works someone like Berggruen acquired in his life turned out to be of little value. But that doesn’t particularly matter if the other 1% turn out to be the work of someone like Picasso.
That’s where the majority of the industry’s returns come from.
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.
Most of financial advice is about today. What should you do right now, and what stocks look like good buys today?
When you accept that tails drive everything in business, investing, and finance you realize that it’s normal for lots of things to go wrong, break, fail, and fall.

Controlling your time: doing what you want, when you want, with who you want, for as long as you want.
Strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing.
Money gives you control over your time by using your money has a lifestyle benefit few luxury goods can compete with.
Aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return.
We’ve used our greater wealth to buy bigger and better stuff, we’ve simultaneously given up more control over our time.

People tend to want wealth to signal to others that they should be liked and admired, you rarely think, “Wow, the guy driving that car is cool” instead of thinking, “Wow, if I had that car people would think I’m cool.”
Humility, kindness, and empathy will bring you more respect than horsepower ever will.
Power of Humility

Wealth is what you don’t see. Wealth is financial assets that haven’t yet been converted into stuff you see.
Wealthy vs. Rich.
- Rich: current income.
- Wealthy: Hidden. Income not spent.
The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth.
Easy to find rich role models. It’s harder to find wealthy ones because by definition their success is more hidden.

Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
Efficiency helps you save money.
Saving without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce.
Powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.
What you need is just what sits below your ego
We all do crazy stuff with money, because we’re all relatively new to this game and what looks crazy to you might make sense to me.

Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable.
Academic finance is devoted to finding the mathematically optimal investment strategies. But in the real world, they do not want the mathematically optimal strategy.
Financial strategies have a social component that is often ignored when viewed through a strictly financial lens.
A rational investor makes decisions based on numeric facts.
The reasonable investors who love their technically imperfect strategies have an edge, because they’re more likely to stick with those strategies.
*Invest in a promising company you don’t care about, and you might enjoy it when everything’s going well. But when the tide inevitably turns you’re suddenly losing money on something you’re not interested in.