The Psychology of Money



  • 1. Earned success and deserved failure fallacy: a tendency to underestimate the role of luck and risk, and a failure to recognize that luck and risk are different sides of the same coin.
    • e.g. Discount Factor in game theory
  • 3. Rich man in the car paradox
    • The person with the nice car is less rich for having bought it!
      • Wealth is what you don’t see.
    • Don’t conflate the possession with the person
    • First rule of compounding: Never interrupt it unnecessarily.
    • Balance is a good policy when there is so much change happening
  • 5. Anchored-to-your-own-history bias: your personal experiences make up maybe 0.00000000000001% of what’s happened in the world but maybe 80% of how you think the world works.
    • If you grew up in the 50s and 60s, you have a completely different impression of the stock market than if you were born in 1970. But the overall trend has been the same!!
    • This will make the behavior of other people make much more sense. If you can control for it there are lots of opportunities for you.
    • Don’t over-admire people who have been there, done that when it comes to money. Things will change from when they had their success.
    • “If it bleeds it leads” leads to overall sadness
    • Far more reasons to be optimistic!
  • Linear thinking is so much more intuitive than exponential thinking. […] If I ask you to calculate 8 + 8… + 8 in your head, it’s 72. If I ask you to calculate 89, your head explodes (it’s 134,217,728). **COMPOUND INTEREST IS FANATASTIC.
  • **Real contrarianism is when your views are so uncomfortable and belittled that they cause you to second guess whether they’re right. Very few people can do that. But of course that’s the case. Most people can’t be contrarian, by definition. Embrace with both hands that, statistically, you are one of those people.
  • Boredom: The purpose of investing is to maximize returns, not minimize boredom. Boring is perfectly fine. Boring is good. If you want to frame this as a strategy, remind yourself: opportunity lives where others aren’t, and others tend to stay away from what’s boring.