I’m back with the second part of the Psychology of Money, covering chapters 11-20. Here we go!
11. Reasonable vs Rational
Be more reasonable than rational. Being realistic can help you stay persistent and consistent.
Loving your investments makes it easier to stay consistent and not be swayed by market fluctuations.
If you feel that a decision might lead to regret, reconsider before taking action. Sometimes, our instincts are strong, but we still ignore them. When making investment decisions, avoid following the crowd blindly. Understand the market you’re entering and the reasons behind your choices.
While “doing what you love” might sound cliché, it can provide the endurance needed for success.
12. Surprise!
Using the past to predict the future can be misleading. The world is full of surprises, and history doesn’t always repeat itself. Relying too much on historical situations can cause us to miss important clues.
Recognize that the future will always be different from the past. History can mislead because it’s often irrelevant to today’s world. For example, the specifics will vary while housing bubbles and financial collapses can recur. It’s essential to learn from history but remember that it’s not an exact guide.
As the saying goes, “The further back you look, the more general your takeaways should be.”
13. Room for Error
Planning is important, but so is planning for when things don’t go according to plan. This chapter teaches us to embrace uncertainty, unknowns, and randomness. The world isn’t just black and white, it’s full of gradients and hidden gray areas that are unpredictable.
The inability to predict can be frustrating. That’s why it’s crucial to create a margin of safety or room for error. This room allows us to endure a range of potential outcomes and remain consistent, letting the odds work in our favor.
People who plan for errors understand risks and prepare to endure fluctuations. Having a margin of safety helps us differentiate between what we can handle and what’s emotionally tolerable, which reduces volatility’s impact.
Taking risks is necessary for progress, but it’s important to manage them wisely. The goal is to survive and stay in the game as long as possible.
As one saying goes, “The ability to do what we want, when we want, and for as long as we want, has an infinite ROI.”
Planning for the unpredictable is challenging, but essential. We can always plan for any kind of situation except the things that are too crazy to cross our minds. Everything that can break will eventually break, so don’t rely on a single plan.
14. We Will Change, You Will Change
Do you often make long-term plans? How has your journey to achieve your ultimate goal been? Unpredictable situations are common, and our desires change over time, that’s why sometimes it’s hard to be consistent with our plans.
Have you ever chased a dream only to realize it wasn’t what you imagined? We often fail to predict our future accurately. While imagining the future can be fun, basing it on unrealistic assumptions can lead to disappointment.
When making long-term decisions, consider these two points:
- Avoid extreme ends in financial planning. Ensure your work-life balance is sustainable to avoid future regrets. A balanced life increases the odds of persistence and consistency.
- Accept the reality of changing your mind. Loyalty to your job isn’t as important as staying true to yourself. Pursue changes for your well-being and seek opportunities, regardless of age or appearance. You’re not a prisoner of your past, new decisions can lead to different outcomes.
15. Nothing is Free
“Every decision has a cost, but not all costs are visible.”
Do you worry more about the price or your willingness to pay it? People often judge our decisions because they’re not the ones making them. As Jeff Immelt said, “Every job looks easy when you’re not the one doing it.”
We often underestimate the price of success, which prevents us from achieving it. Avoiding the cost now can lead to paying double later. Consider why people often prioritize materialistic desires over financial futures. It’s usually because they want instant gratification. However, seeing investment results takes time.
Understand the difference between fees and fines. Fines are punitive, and fees are the cost of something valuable. When managing money, view volatility as a fee, not a fine.
Investing involves fees, like buying a concert ticket for your favorite artist. Volatility is a part of the many decisions we make, not a forced payment. Usually what we accept to pay offers us good things.
“You get what you pay for.”
16. You and Me
Not every strategy works for everyone. Following the hacks of the rich and successful doesn’t guarantee the same results. Financial futures are uncertain, and there’s no clear warning about what will work.
For example, when we are trying to cook according to the recipe that we find online, we often get different tastes and results from what we’ve expected.
Take cues from people playing the same game as you. These are individuals with matching goals and time horizons. Before following someone’s guidance, consider their unique circumstances, challenges, and experiences. You are you, and they are them.
17. The Seduction of Pessimism
Pessimism often carries a negative connotation, but it can be useful when dealing with money. It helps us stay grounded and not overreach. Addressing threats as a priority doesn’t mean neglecting opportunities. It’s just a different perspective.
Here are some facts about pessimism:
- Financial news often captures attention when it’s bad, like during recessions or stock market crashes.
- Pessimists may forecast trends without considering how markets adapt.
- Progress happens slowly, while setbacks are quick and noticeable.
Just like: Building a reputation takes years, but it can be destroyed overnight.
18. When You Will Believe to Anything
Appealing fictions give us a sense of happiness. We often believe things because we want them to be true. This is why astrology and old tales persist—they hold our expectations and fears. To avoid letting the imagination run wild, maintain a margin of safety. Believe in your plans, but have a backup if things go sideways. This prevents greater disappointment.
We create narratives to ensure that our story makes sense to the world, even when we lack complete information. Often, we don’t know what we don’t know, leading to incorrect assumptions.
Explaining the past can be an illusion to make the world seem more understandable. And when we don’t know things, it explains that a lot of things are beyond our control.
19. All Together Now
To make better financial decisions:
- Be humble when things go right and forgiving when they don’t.
- Save for a better future rather than indulging in materialistic desires.
- Manage your money so you can sleep peacefully without regrets.
- Use time horizons in investing to minimize the impact of mistakes and benefit from consistent planning.
- Stay focused on the big picture and don’t get bogged down by temporary setbacks.
- Value time more than money. It’s the highest dividend you can earn.
- Avoid exaggerating wealth and fame. True admiration comes from humility and respect.
- Save for the unexpected. Preparing early reduces the impact of unforeseen events.
- Recognize that nothing is free. Every gain requires a trade-off.
- Maintain a margin of safety for endurance and flexibility.
- Avoid extremes to prevent regret.
- Play your own game, not someone else’s. Everyone’s journey is unique.
20. Confession
Financial decisions are often made to minimize disappointment rather than maximize returns. What works for one person may not work for another.
The author shares his approach:
- The goal is independence, not to become rich. Independence means doing what you want on your own terms, not necessarily living luxuriously or frugally.
- Live below your means. This reduces social pressure and leads to peace of mind.
- Good conditions aren’t always rational. Maintain 20% of assets in liquid form and avoid selling stocks under pressure.
- Choose a strategy with high odds of success. It’s unreasonable to push others into paths you couldn’t follow yourself.
In summary, the key priorities are high savings rates, patience, and optimism.
That’s all for the summary of the book The Psychology of Money. Hope to see you soon in another episode, and hope you can learn something from this lengthy article.
Housel, M. (2020). The Psychology of Money. Harriman House Limited. http://books.google.ie/books?id=TnrrDwAAQBAJ&printsec=frontcover&dq=psychology+of+money&hl=&cd=1&source=gbs_api
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