The Psychology of Money by Morgan Housel

These are my notes from The Psychology of Money by Morgan Housel. Each one contains a core idea from the book that stood out. The goal of writing my notes this way is that each could be it's own independent idea with the need for the specific context within the book.

Study Patterns, Not People

It’s dangerous to try and emulate successful people. You discount the luck that played a role in their success when you do. The billionaires and CEOs are the result of survivorship bias. Their wisdom is less applicable to other situations. The more extreme an outcome, the less relevant the advice is to the average person. Instead, it’s more actionable to study broad patterns. Macro trends. Patterns of success and failure demonstrate the right qualities to emulate and avoid. The more common the pattern is, the more applicable it will be to your situation.

The Invaluable Parts of Life

Reputation is invaluable.
Freedom and independence are invaluable.
Family and friends are invaluable.
Respect from those you want to respect you is invaluable.
Happiness is invaluable.

Most people lose the priceless things in life because they put value on things that can be measured easily. The invaluable parts of life take intention and effort to get, but even greater amounts of energy to maintain. Don’t allow yourself to become derailed from what matters by putting too much attention on irrelevant things.

Flexibility Is the Competitive Advantage

The internet created a world of hyper-competition. Any knowledge you need exists only milliseconds from your reach. Skills that were previously required to fulfill a job are automated by technology. The competitive advantage you have is specialized knowledge and soft skills. Flexibility is the central component in building your value up to the world. Flexibility allows you to develop patience. You gain the luxury of waiting for great opportunities to come. You get the ability to learn new skills and develop deeper knowledge. The person who has more control over their situation makes less mistakes. Decisions are thought out. Assumptions removed. There's a sense of rhythm and timing they develop. Flexibility sets you apart because you can do the things others can't.

Mental Models Influence Money Decisions

Some people know how to make money. Others know how to keep it. Yet there's some people that cannot seem to do either. Every money decision people make is influenced by the mental models people have. They feed the information they get through the frameworks they perceive the world through and try to make the best possible decision.

Rational Isn't Reasonable

It's rational to want a fever when you're sick. A one-degree increase in the body's temperature slows the replication rate of some viruses by a factor of 200. But it's not reasonable. Despite fevers turning on the body's immune system, we view them as bad. Why? Fevers are uncomfortable and we don't like discomfort. When you have a fever of 106 and your shivering uncontrollably, rationale goes out the window. Economists try to model out what happens to businesses based on consumer preferences. Yet they never hold true. The optimal outcome in game theory strategies rarely ever happens. This is because humans are not rational, we are reasonable. Reason is a combination of logic and emotions. It's far more useful than rationale.

The End of History Illusion

The End of History Illusion is our tendency to underestimate how much change we will experience in the next 10 years. We remember how much we changed over the last 10 years, but believe that our personal history has come to an end. We believe we are the person we were meant to become. We believe our personality, preferences, goals, and desires will stay the same. Psychologist Dan Gilbert says, at every stage of our lives we make decisions that will profoundly influence the lives of the people we're going to become, and then when we become those people, we're not always thrilled with the decisions we made. Because we believe we won't change, we overpay for our current preferences. We believe they are stable. This happens because it's easier to remember where we came from than it is to imagine who we will become.

A Range of Experiences

Our personal experiences make up a fraction of what's happened in the world, but a majority of the way we believe it works. When John F. Kennedy was running for president, he was asked by a reporter what he remembered about the Great Depression. 25 years after it happened, he said, "I have no first-hand knowledge of the Depression. My family had one of the great fortunes of the world, and it was worth more than ever then. We had bigger houses, more servants, we traveled more. About the only thing that I saw directly was that my father hired some extra gardeners just to give them a job so they could eat. I really did not learn about the Depression until I read about it at Harvard." Here was an event that impacted a majority of American lives, while JFK's experience was far from reality. With every event comes a range (or distribution) of experiences.

The Duality of Wealth

Getting money and keeping it are two different skills. Getting money requires risks, optimism, and a sense of urgency to be a "go-getter." Optimists get to be rich. But to keep your money, it requires all the opposite skills. You're required to take on humility, some cynicism, frugality, and acceptance of luck. It's important to recognize when you're in the season of your life that requires each set of qualities and switch between those. It's an underrated skill that the majority of people don't have. They get stuck in a single mode—either getting money or keeping it. Your window for success will not last forever. Building wealth requires you to accept the duality in it. Being paranoid and optimistic at the same time is hard to maintain, but barbellled optimism provides you longevity to exploit luck.

Build a Portfolio of Bets Too Big to Fail

Walt Disney's breakout moment came from his animation of Steamboat Willie. But the success of Mickey Mouse didn’t lead to business success. Steamboat Willie was a result of Disney losing the intellectual property to Oswald the Lucky Rabbit. Walt Disney was a creator and animator—business wasn’t his strong suit. His first studios went bankrupt. For 15 years, Disney produced expensive animations. He bled through more than 400 different cartoons. Finally, everything changed with Snow White and the Seven Dwarfs—earning $8 million in 6 months. This animation transformed his studio. The company's debts were paid off and he managed to further the business. With a portfolio of hundreds of hours of footage, the 83 minutes of Snow White was what kept him from failing again. Disney did so much work it became difficult for him not to get lucky.

Fees vs. Fines

People have no problem paying for parking, but hate it when they get a parking ticket. They’re fine with paying fees but want to avoid fines (even if the cost is less). When we pay for things where the price tag may not be immediately obvious, any additional cost feels like a fine. You invest in a stock and because markets are volatile and go down, that loss in wealth feels like a fine. It’s something to be avoided. Things look different if you start to view them as fees. That decline in the market is just a short fee for compounding returns. The tradeoff for the cost is easier to stomach when you reframe why you’re paying it. Uncertainty is a better fee to pay than the fines of regret.

Stop Moving the Goal Post

Modern capitalism creates an ever-moving goal post. Expectations rise with results. Ambitions grow twice as fast as satisfaction. Each step moves the goalline forward. You work twice as hard to try and reach your new goal, and it lands right back to the same place. An important skill is understanding when to stop moving the finish line. If you don’t slow down, you’ll feel like you're falling behind. This will drive you to take greater and greater risks until it eventually leads you back at the start or with severe burnout because of your need to surpass your peers.