The Psychology of Money
One, financial outcomes are driven by luck, independent of intelligence and effort. (Location 77)
Two (and I think more common), that financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. (Location 78)
Finance is overwhelmingly taught as a math-based field, where you put data into a formula and the formula tells you what to do, and it’s assumed that you’ll just go do it. (Location 82)
Two topics impact everyone, whether you are interested in them or not: health and money. (Location 88)
we think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance). (Location 97)
Money is everywhere, it affects all of us, and confuses most of us. (Location 99)
Finance is different. It’s guided by people’s behaviors. And how I behave might make sense to me but look crazy to you. (Location 107)
To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism. To get why investors sell out at the bottom of a bear market you don’t need to study the math of expected future returns; you need to think about the agony of looking at your family and wondering if your investments are imperiling their future. I love Voltaire’s observation that “History never repeats itself; man always does.” (Location 110)
People do some crazy things with money. But no one is crazy. (Location 122)
People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons. (Location 123)
Everyone has their own unique experience with how the world works. (Location 125)
What seems crazy to you might make sense to me. (Location 127)
The person who grew up when inflation was high experienced something the person who grew up with stable prices never had to. (Location 129)
The stock broker who lost everything during the Great Depression experienced something the tech worker basking in the glory of the late 1990s can’t imagine. (Location 130)
Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behavior. (Location 151)
We all think we know how the world works. But we’ve all only experienced a tiny sliver of it. (Location 152)
“some lessons have to be experienced before they can be understood.” (Location 153)
In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time. (Location 156)
“Our findings suggest that individual investors’ willingness to bear risk depends on personal history.” (Location 162)
Not intelligence, or education, or sophistication. Just the dumb luck of when and where you were born. (Location 163)
a view about money that one group of people thinks is outrageous can make perfect sense to another. (Location 187)
But mostly it’s an example of how different experiences can lead to vastly different views within topics that one side intuitively thinks should be black and white. (Location 197)
Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works. (Location 198)
But every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check. (Location 201)
Take a simple example: lottery tickets. Americans spend more on them than movies, video games, music, sporting events, and books combined. (Location 203)
The lowest-income households in the U.S. on average spend $412 a year on lotto tickets, four times the amount of those in the highest income groups. (Location 205)
We live paycheck-to-paycheck and saving seems out of reach. Our prospects for much higher wages seem out of reach. We can’t afford nice vacations, new cars, health insurance, or homes in safe neighborhoods. We can’t put our kids through college without crippling debt. Much of the stuff you people who read finance books either have now, or have a good chance of getting, we don’t. Buying a (Location 211)
lottery ticket is the only time in our lives we can hold a tangible dream of getting the good stuff that you already have and take for granted. We are paying for a dream, and you may not understand that because you are already living a dream. That’s why we buy more tickets than you do. (Location 214)
idea—“What you’re doing seems crazy but I kind of understand why you’re doing it.”—uncovers the root of many of our financial decisions. (Location 217)
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. But no one is crazy—we all make decisions based on our own unique experiences that seem to make sense to us in a given moment. (Location 250)
“If there had been no Lakeside, there would have been no Microsoft,” he told the school’s graduating class in 2005. (Location 274)
equally powerful dose of luck’s close sibling, risk. (Location 278)
Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. (Location 294)
the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. (Location 295)
The accidental impact of actions outside of your control can be more consequential than the ones you consciously take. (Location 297)
“What do you want to know about investing that we can’t know?” “The exact role of luck in successful outcomes,” (Location 302)
When judging others, attributing success to luck makes you look jealous and mean, even if we know it exists. And when judging yourself, attributing success to luck can be too demoralizing to accept. (Location 307)
If you are rich and tall, your brother is more likely to also be rich than he is tall. (Location 309)
Everything worth pursuing has less than 100% odds of succeeding, and risk is just what happens when you end up on the unfortunate side of that equation. (Location 314)
someone else’s failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of risk. (Location 322)
The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. (Location 325)
But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side. (Location 326)
If we had a magic wand we would find out exactly what proportion of these outcomes were caused by actions that are repeatable, versus the role of random risk and luck that swayed those actions one way or the other. (Location 331)
when does the narrative shift from, “You didn’t let outdated laws get in the way of innovation,” to “You committed a crime?” (Location 347)
we don’t give risk and luck their proper billing it’s often invisible. (Location 352)
“One lucky break, or one supremely shrewd decision—can we tell them apart?” (Location 356)
The best (and worst) managers drive their employees as hard as they can. (Location 361)
The line between “inspiringly bold” and “foolishly reckless” can be a millimeter thick and only visible with hindsight. (Location 362)
Risk and luck are doppelgangers. (Location 363)
This is not an easy problem to solve. The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money. (Location 364)
Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. (Location 366)
just be careful when assuming that 100% of outcomes can be attributed to effort and decisions. (Location 367)
But realize that not all success is due to hard work, and not all poverty is due to laziness. (Location 370)
Therefore, focus less on specific individuals and case studies and more on broad patterns. (Location 372)
The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk. (Location 374)
people who have control over their time tend to be happier in life is a broad and common enough observation that you can do something with it. (Location 379)
When things are going extremely well, realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly. (Location 384)
Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk. (Location 386)
The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor. (Location 387)
Nothing is as good or as bad as it seems. (Location 390)
why someone worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more. (Location 432)
Crime committed by those living on the edge of survival is one thing. (Location 434)
To make money they didn’t have and didn’t need, they risked what they did have and did need. (Location 441)
If you risk something that is important to you for something that is unimportant to you, it just does not make any sense. (Location 442)
The hardest financial skill is getting the goalpost to stop moving. (Location 447)
It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction. (Location 449)
In that case one step forward pushes the goalpost two steps ahead. You feel as if you’re falling behind, and the only way to catch up is to take greater and greater (Location 450)
Modern capitalism is a pro at two things: generating wealth and generating envy. (Location 451)
Happiness, as it’s said, is just results minus expectations. (Location 453)
The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. (Location 461)
Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you. (Location 462)
“Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret. (Location 468)
There are many things never worth risking, no matter the potential gain. (Location 474)
Don’t get too attached to anything—your reputation, your accomplishments or any of it. (Location 476)
Reputation is invaluable. (Location 479)
Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. (Location 480)
The good news is that the most powerful tool for building enough is remarkably simple, and doesn’t require taking risks that could damage any of these things. (Location 483)
If something compounds—if a little growth serves as the fuel for future growth—a small starting base can lead to results so extraordinary they seem to defy logic. (Location 515)
His skill is investing, but his secret is time. That’s how compounding works. (Location 531)
Think of this another way. Buffett is the richest investor of all time. But he’s not actually the greatest—at least not when measured by average annual returns. (Location 532)
Linear thinking is so much more intuitive than exponential thinking. (Location 545)
The danger here is that when compounding isn’t intuitive we often ignore its potential and focus on solving problems through other means. (Location 558)
None of the 2,000 books picking apart Buffett’s success are titled This Guy Has Been Investing Consistently for Three-Quarters of a Century. (Location 560)
There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait. It’s just one page with a long-term chart of economic growth. (Location 562)
But good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild. (Location 567)
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. (Location 571)
Getting money requires taking risks, being optimistic, and putting yourself out there. (Location 610)
But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. (Location 611)
It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely. (Location 612)
Not “growth” or “brains” or “insight.” The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. (Location 619)
We can spend years trying to figure out how Buffett achieved his investment returns: how he found the best companies, the cheapest stocks, the best managers. That’s hard. Less hard but equally important is pointing out what he didn’t do. (Location 626)
He didn’t get carried away with debt. He didn’t panic and sell during the 14 recessions he’s lived through. He didn’t sully his business reputation. He didn’t attach himself to one strategy, one world view, or one passing trend. He didn’t rely on others’ money (managing investments through a public company meant investors couldn’t withdraw their capital). He didn’t burn himself out and quit or retire. (Location 628)
“Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.” (Location 643)
More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders. (Location 646)
Merely good returns sustained uninterrupted for the longest period of time—especially in times of chaos and havoc—will always win. (Location 653)
Planning is important, but the most important part of every plan is to plan on the plan not going according to plan. (Location 654)
plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality. (Location 660)
“It’d be great if the market returns 8% a year over the next 30 years, but if it only does 4% a year I’ll still be OK,” (Location 663)
Many bets fail not because they were wrong, but because they were mostly right in a situation that required things to be exactly right. (Location 664)
Room for error—often called margin of safety—is one of the most underappreciated forces in finance. (Location 665)
It comes in many forms: A frugal budget, flexible thinking, and a loose timeline—anything that lets you live happily with a range of outcomes. (Location 666)
Conservative is avoiding a certain level of risk. Margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival. (Location 667)
A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital. (Location 669)
Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery. (Location 671)
You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive. (Location 673)
Destruction in the face of progress is not only possible, but an efficient way to get rid of excess. (Location 677)
Economies, markets, and careers often follow a similar path—growth amid loss. (Location 681)
But you need short-term paranoia to keep you alive long enough to exploit long-term optimism. (Location 694)
“I’ve been banging away at this thing for 30 years. I think the simple math is, some projects work and some don’t. There’s no reason to belabor either one. Just get on to the next.” (Location 701)
Perhaps 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. (Location 715)
A lot of things in business and investing work this way. Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes. (Location 717)
That can be hard to deal with, even if you understand the math. It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do. (Location 719)
Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. (Location 728)
And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are. (Location 729)
If you want safer, predictable, and more stable returns, you invest in large public companies. (Location 737)
Most public companies are duds, a few do well, and a handful become extraordinary winners that account for the majority of the stock market’s returns. (Location 740)
In 2018, Amazon drove 6% of the S&P 500’s returns. And Amazon’s growth is almost entirely due to Prime and Amazon Web Services, which itself are tail events in a company that has experimented with hundreds of products, from the Fire Phone to travel agencies. (Location 761)
So the people working on these tail projects that drive tail returns have tail careers. (Location 766)
of the time or less—when everyone else around you is going crazy. (Location 772)
How you behaved as an investor during a few months in late 2008 and early 2009 will likely have more impact on your lifetime returns than everything you did from 2000 to 2008. (Location 784)
There is the old pilot quip that their jobs are “hours and hours of boredom punctuated by moments of sheer terror.” (Location 785)
A 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. Tails drive everything. (Location 787)
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. (Location 789)
Note: Combine that with experimentation
Something I’ve learned from both investors and entrepreneurs is that no one makes good decisions all the time. (Location 797)
It’s OK for Amazon to lose a lot of money on the Fire Phone because it will be offset by something like Amazon Web Services that earns tens of billions of dollars. Tails to the rescue. (Location 802)
Netflix CEO Reed Hastings once announced his company was canceling several big-budget productions. He responded: Our hit ratio is way too high right now. I’m always pushing the content team. We have to take more risk. You have to try more crazy things, because we should have a higher cancel rate overall. (Location 804)
These are not delusions or failures of responsibility. They are a smart acknowledgement of how tails drive success. For every Amazon Prime or Orange is The New Black you know, with certainty, that you’ll have some duds. Part of why this isn’t intuitive is because in most fields we only see the finished product, not the losses incurred that led to the tail-success product. (Location 806)
“If you remove just a few of Berkshire’s top investments, its long-term track record is pretty average.” (Location 821)
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” (Location 830)
But if there’s a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives. (Location 832)
The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays. (Location 833)
Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered. (Location 840)
Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy. (Location 842)
Note: Freedom gives happiness
Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time. (Location 843)
To obtain, bit by bit, a level of independence and autonomy that comes from unspent assets that give you greater control over what you can do and when you can do it. (Location 844)
A small amount of wealth means the ability to take a few days off work when you’re sick without breaking the bank. Gaining that ability is huge if you don’t have it. A bit more means waiting for a good job to come around after you get laid off, rather than having to take the first one you find. That can be life changing. Six months’ emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job. More still means the ability to take a job with lower pay but flexible hours. Maybe one with a shorter commute. Or being able to deal with a medical emergency without the added burden of worrying about how you’ll pay for it. Then there’s retiring when you want to, instead of when you need to. (Location 845)
Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with. (Location 852)
But doing something you love on a schedule you can’t control can feel the same as doing something you hate. (Location 860)
People like to feel like they’re in control—in the drivers’ seat. When we try to get them to do something, they feel disempowered. (Location 862)
Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.²⁵ (Location 863)
When you accept how true that statement is, you realize that 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. (Location 865)
30 Lessons for Living, gerontologist Karl Pillemer (Location 912)
Controlling your time is the highest dividend money pays. (Location 920)
When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think. (Location 926)
people tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired. (Location 928)
“You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.” (Location 931)
It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. (Location 939)
Humility, kindness, and empathy will bring you more respect than horsepower ever will. (Location 941)
Wealth is what you don’t see. (Location 944)
We tend to judge wealth by what we see, because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Instagram photos. (Location 954)
But the truth is that wealth is what you don’t see. (Location 956)
Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see. (Location 957)
“Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”³⁰ (Location 960)
When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire. (Location 962)
“There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have. It’s really that simple.”³¹ (Location 964)
Rich is a current income. Someone driving a $100,000 car is almost certainly rich, because even if they purchased the car with debt you need a certain level of income to afford the monthly payment. Same with those who live in big homes. It’s not hard to spot rich people. They often go out of their way to make themselves known. (Location 968)
But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now. (Location 971)
The problem for many of us is that it is easy to find rich role models. It’s harder to find wealthy ones because by definition their success is more hidden. (Location 979)
Imagine how hard it would be to learn how to write if you couldn’t read the works of great authors. (Location 989)
The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency. Keep this in mind when quickly judging others’ success and setting your own goals. (Location 991)
Note: Awesome
Past a certain level of income people fall into three groups: Those who save, those who don’t think they can save, and those who don’t think they need to save. (Location 997)
The world grew its “energy wealth” not by increasing the energy it had, but by decreasing the energy it needed. (Location 1007)
Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today. (Location 1014)
Wealth is just the accumulated leftovers after you spend what you take in. (Location 1018)
you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more. (Location 1019)
Learning to be happy with less money creates a gap between what you have and what you want—similar to the gap you get from growing your paycheck, but easier and more in your control. A high savings rate means having lower expenses than you otherwise could, and having lower expenses means your savings go farther than they would if you spent more. (Location 1025)
Past a certain level of income, what you need is just what sits below your ego. (Location 1034)
But spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money. (Location 1036)
Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility. (Location 1037)
So people’s ability to save is more in their control than they might think. Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you. As I argue often in this book, money relies more on psychology than finance. And you don’t need a specific reason to save. Some people save money for a downpayment on a house, or a new car, or for retirement. That’s great, of course. But saving does (Location 1042)
You can spend less if you desire less. And you will desire less if you care less about what others think of you. As I argue often in this book, money relies more on psychology than finance. (Location 1043)
And you don’t need a specific reason to save. (Location 1045)
Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment. (Location 1049)
the intangible benefits of money can be far more valuable and capable of increasing your happiness than the tangible things that are obvious targets of our savings. (Location 1052)
Note: Awesome
Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. (Location 1053)
What is the return on cash in the bank that gives you the option of changing careers, or retiring early, or freedom from worry? (Location 1057)
When you don’t have control over your time, you’re forced to accept whatever bad luck is thrown your way. (Location 1060)
But if you have flexibility you have the time to wait for no-brainer opportunities to fall in your lap. This is a hidden return on your savings. (Location 1061)
Note: Awesome
Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate. (Location 1062)
teaching, marketing, analysis, consulting, accounting, programming, journalism, and even medicine increasingly compete in global talent pools. (Location 1070)
Intelligence is not a reliable advantage in a world that’s become as connected as ours has. (Location 1075)
In a world where intelligence is hyper-competitive and many previous technical skills have become automated, competitive advantages tilt toward nuanced and soft skills—like communication, empathy, and, perhaps most of all, flexibility. (Location 1076)
If you have flexibility you can wait for good opportunities, both in your career and for your investments. (Location 1078)
You’ll have a better chance of being able to learn a new skill when it’s necessary. You’ll feel less urgency to chase competitors who can do things you can’t, and have more leeway to find your passion and your niche at your own pace. (Location 1079)
You can find a new routine, a slower pace, and think about life with a different set of assumptions. The ability to do those things when most others can’t is one of the few things that will set you apart in a world where intelligence is no longer a sustainable advantage. (Location 1080)
Having more control over your time and options is becoming one of the most valuable currencies in the world. (Location 1082)
Note: Awesome
You’re not a spreadsheet. You’re a person. A screwed up, emotional person. (Location 1086)
Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. (Location 1088)
A doctor’s goal is not just to cure disease. It’s to cure disease within the confines of what’s reasonable and tolerable to the patient. (Location 1118)
Fevers can have marginal benefits in fighting infection, but they hurt. (Location 1119)
That philosophy—aiming to be reasonable instead of rational—is one more people should consider when making decisions with their money. (Location 1122)
They want the strategy that maximizes for how well they sleep at night. (Location 1125)
“minimizing future regret” is hard to rationalize on paper but easy to justify in real life. (Location 1130)
A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down, or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your own personal doubts. (Location 1131)
Investing has a social component that’s often ignored when viewed through a strictly financial lens. (Location 1133)
What’s often overlooked in finance is that something can be technically true but contextually nonsense. (Location 1139)
But if lacking emotions about your strategy or the stocks you own increases the odds you’ll walk away from them when they become difficult, what looks like rational thinking becomes a liability. (Location 1152)
The reasonable investors who love their technically imperfect strategies have an edge, because they’re more likely to stick with those strategies. (Location 1153)
There are few financial variables more correlated to performance than commitment to a strategy during its lean years—both the amount of performance and the odds of capturing it over a given period of time. (Location 1154)
Anything that keeps you in the game has a quantifiable advantage. (Location 1157)
If you view “do what you love” as a guide to a happier life, it sounds like empty fortune cookie advice. If you view it as the thing providing the endurance necessary to put the quantifiable odds of success in your favor, you realize it should be the most important part of any financial strategy. (Location 1158)
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. It’s a double burden, and the path of least resistance is to move onto something else. (Location 1160)
If you’re passionate about the company to begin with—you love the mission, the product, the team, the science, whatever—the inevitable down times when you’re losing money or the company needs help are blunted by the fact that at least you feel like you’re part of something meaningful. (Location 1162)
“home bias,” where people prefer to invest in companies from the country they live in while ignoring the other 95%+ of the planet. (Location 1166)
If familiarity helps you take the leap of faith required to remain backing those strangers, it’s reasonable. (Location 1167)
Most forecasts about where the economy and the stock market are heading next are terrible, but making forecasts is reasonable. (Location 1173)
Acting on investment forecasts is dangerous. (Location 1174)
“Things that have never happened before happen all the time.” (Location 1182)
It is smart to have a deep appreciation for economic and investing history. (Location 1184)
History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future. (Location 1185)
“historians as prophets” fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress. (Location 1186)
The cornerstone of economics is that things change over time, because the invisible hand hates anything staying too good or too bad indefinitely. (Location 1194)
Experiencing specific events does not necessarily qualify you to know what will happen next. In fact it rarely does, because experience leads to overconfidence more than forecasting ability. (Location 1200)
A handful of outlier events play an enormous role because they influence so many unrelated events in their wake. (Location 1212)
The thing that makes tail events easy to underappreciate is how easy it is to underestimate how things compound. (Location 1225)
The majority of what’s happening at any given moment in the global economy can be tied back to a handful of past events that were nearly impossible to predict. (Location 1229)
This is not a failure of analysis. It’s a failure of imagination. Realizing the future might not look anything like the past is a special kind of skill that is not generally looked highly upon by the financial forecasting community. (Location 1242)
correct lesson to learn from surprises: that the world is surprising. (Location 1247)
The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next. (Location 1248)
The most important economic events of the future—things that will move the needle the most—are things that history gives us little to no guide about. (Location 1249)
History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world. (Location 1254)
There are plenty of theories on why recessions have become less frequent. One is that the Fed is better at managing the business cycle, or at least extending it. Another is that heavy industry is more prone to boom-and-bust overproduction than the service industries that dominated the last 50 years. The pessimistic view is that we now have fewer recessions, but when they occur they are more powerful than before. For our argument it doesn’t particularly matter what caused the change. What matters is that things clearly changed. (Location 1271)
Graham was constantly experimenting and retesting his assumptions and seeking out what works—not what worked yesterday but what works today. (Location 1290)
Graham died in 1976. If the formulas he advocated were discarded and updated five times between 1934 and 1972, how relevant do you think they are in 2020? Or will be in 2050? (Location 1296)
An interesting quirk of investing history is that the further back you look, the more likely you are to be examining a world that no longer applies to today. (Location 1304)
General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff. (Location 1313)
But specific trends, specific trades, specific sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Historians are not prophets. (Location 1315)
There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone—not consistently, anyways. You have to give yourself room for error. You have to plan on your plan not going according to plan. (Location 1331)
History is littered with good ideas taken too far, which are indistinguishable from bad ideas. (Location 1338)
The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—“unknowns”—are an ever-present part of life. (Location 1339)
“the purpose of the margin of safety is to render the forecast unnecessary.” (Location 1343)
Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world. (Location 1344)
Two things cause us to avoid room for error. One is the idea that somebody must know what the future holds, driven by the uncomfortable feeling that comes from admitting the opposite. (Location 1357)
The second is that you’re therefore doing yourself harm by not taking actions that fully exploit an accurate view of that future coming true. (Location 1358)
Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor. (Location 1361)
The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound. So the person with enough room for error in part of their strategy (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong. (Location 1362)
Spreadsheets are good at telling you when the numbers do or don’t add up. They’re not good at modeling how you’ll feel when you tuck your kids in at night wondering if the investment decisions you’ve made were a mistake that will hurt their future. (Location 1373)
“Russian roulette should statistically work” syndrome: An attachment to favorable odds when the downside is unacceptable in any circumstances. (Location 1389)
“You can be risk loving and yet completely averse to ruin.” (Location 1390)
The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. (Location 1391)
Leverage is the devil here. Leverage—taking on debt to make your money go further—pushes routine risks into something capable of producing ruin. The danger is that rational optimism most of the time masks the odds of ruin some of the time. The result is we systematically underestimate risk. Housing prices fell 30% last decade. A few companies defaulted on their debt. That’s capitalism. It happens. But those with high leverage had a double wipeout: Not only were they left broke, but being wiped out erased every opportunity to get back in the game at the very moment opportunity was ripe. (Location 1397)
A homeowner wiped out in 2009 had no chance of taking advantage of cheap mortgage rates in 2010. Lehman Brothers had no chance of investing in cheap debt in 2009. They were done. (Location 1401)
money as barbelled. I take risks with one portion and am terrified with the other. (Location 1402)
I just want to ensure I can remain standing long enough for my risks to pay off. You have to survive to succeed. (Location 1404)
The ability to do what you want, when you want, for as long as you want, has an infinite ROI. (Location 1405)
You can plan for every risk except the things that are too crazy to cross your mind. And those crazy things can do the most harm, because they happen more often than you think and you have no plan for how to deal with them. (Location 1415)
“genetically programmed to recognize and avoid serious risks, including those never before encountered.”⁴⁵ (Location 1417)
Avoiding these kinds of unknown risks is, almost by definition, impossible. You can’t prepare for what you can’t envision. (Location 1427)
If there’s one way to guard against their damage, it’s avoiding single points of failure. (Location 1428)
A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure. (Location 1429)
The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future. (Location 1434)
you don’t need a specific reason to save. (Location 1436)
It’s fine to save for a car, or a home, or for retirement. But it’s equally important to save for things you can’t possibly predict or even comprehend—the financial equivalent of field mice. (Location 1437)
the most important part of every plan is planning on your plan not going according to plan. (Location 1441)
Imagining a goal is easy and fun. Imagining a goal in the context of the realistic life stresses that grow with competitive pursuits is something entirely different. (Location 1453)
But we should acknowledge that a new parent in their 30s may think about life goals in a way their 18-year-old self making career goals would never imagine. (Location 1465)
Long-term financial planning is essential. But things change—both the world around you, and your own goals and desires. (Location 1466)
you, yourself, don’t know today what you will even want in the future. (Location 1467)
The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future. (Location 1469)
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. (Location 1471)
Gilbert’s research shows people from age 18 to 68 underestimate how much they will change in the future. (Location 1477)
We should avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret. (Location 1488)
The fuel of the End of History Illusion is that people adapt to most circumstances, so the benefits of an extreme plan—the simplicity of having hardly anything, or the thrill of having almost everything—wear off. (Location 1490)
But the downsides of those extremes—not being able to afford retirement, or looking back at a life spent devoted to chasing dollars—become enduring regrets. (Location 1491)
Regrets are especially painful when you abandon a previous plan and feel like you have to run in the other direction twice as fast to make up for lost time. (Location 1492)
This is true for not only savings but careers and relationships. Endurance is key. (Location 1494)
Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum. (Location 1496)
When you accept the End of History Illusion, you realize that the odds of picking a job when you’re not old enough to drink that you will still enjoy when you’re old enough to qualify for Social Security are low. (Location 1500)
The trick is to accept the reality of change and move on as soon as possible. (Location 1502)
Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a devil in a world where people change over time. (Location 1509)
It’s the equivalent of a stranger making major life decisions for you. (Location 1510)
Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimize future regret. (Location 1511)
Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it. (Location 1515)
The problem is that the price of a lot of things is not obvious until you’ve experienced them firsthand, when the bill is overdue. (Location 1516)
those rewarded with dynastic wealth when times are good hold the burden of responsibility when the tide goes out. (Location 1523)
Every job looks easy when you’re not the one doing it because the challenges faced by someone in the arena are often invisible to those in the crowd. (Location 1526)
Most things are harder in practice than they are in theory. Sometimes this is because we’re overconfident. More often it’s because we’re not good at identifying what the price of success is, which prevents us from being able to pay it. (Location 1530)
Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time. (Location 1535)
The inability to recognize that investing has a price can tempt us to try to get something for nothing. (Location 1537)
the Money Gods do not look highly upon those who seek a reward without paying the price. (Location 1554)
The irony is that by trying to avoid the price, investors end up paying double. (Location 1565)
The question is: Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns? (Location 1580)
The price of investing success is not immediately obvious. It’s not a price tag you can see, so when the bill comes due it doesn’t feel like a fee for getting something good. (Location 1581)
thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor. (Location 1586)
Market returns are never free and never will be. They demand you pay a price, like any other product. You’re not forced to pay this fee, just like you’re not forced to go to Disneyland. (Location 1592)
Find the price, then pay it. (Location 1599)
People make financial decisions they regret, and they often do so with scarce information and without logic. (Location 1605)
Investors often innocently take cues from other investors who are playing a different game than they are. (Location 1615)
An idea exists in finance that seems innocent but has done incalculable damage. It’s the notion that assets have one rational price in a world where investors have different goals and time horizons. (Location 1616)
If an asset has momentum—it’s been moving consistently up for a period of time—it’s not crazy for a group of short-term traders to assume it will keep moving up. (Location 1630)
Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term. (Location 1633)
Profits will always be chased. And short-term traders operate in an area where the rules governing long-term investing—particularly around valuation—are ignored, because they’re irrelevant to the game being played. (Location 1658)
Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another. (Location 1660)
“Wow, maybe these other investors know something I don’t.” (Location 1665)
Many finance and investment decisions are rooted in watching what other people do and either copying them or betting against them. (Location 1671)
It’s hard to grasp that other investors have different goals than we do, because an anchor of psychology is not realizing that rational people can see the world through a different lens than your own. (Location 1676)
Rising prices persuade all investors in ways the best marketers envy. They are a drug that can turn value-conscious investors into dewy-eyed optimists, detached from their own reality by the actions of someone playing a different game than they are. (Location 1678)
So much consumer spending, particularly in developed countries, is socially driven: subtly influenced by people you admire, and done because you subtly want people to admire you. (Location 1680)
while we can see how much money other people spend on cars, homes, clothes, and vacations, we don’t get to see their goals, worries, and aspirations. (Location 1682)
When you realize how wrong that notion is you see how vital it is to simply identify what game you’re playing. (Location 1690)
“I am a passive investor optimistic in the world’s ability to generate real economic growth and I’m confident that over the next 30 years that growth will accrue to my investments.” (Location 1691)
Real optimists don’t believe that everything will be great. (Location 1701)
Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. (Location 1702)
Pessimism just sounds smarter and more plausible than optimism. (Location 1729)
Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention. (Location 1730)
book The Rational Optimist: (Location 1739)
“I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” (Location 1747)
Part of it is instinctual and unavoidable. Kahneman says the asymmetric aversion to loss is an evolutionary shield. (Location 1751)
When directly compared or weighted against each other, losses loom larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. (Location 1752)
Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce. (Location 1753)
There are two topics that will affect your life whether you are interested in them or not: money and health. While health issues tend to be individual, money issues are more systemic. (Location 1772)
In a connected system where one person’s decisions can affect everyone else, it’s understandable why financial risks gain a spotlight and capture attention in a way few other topics can. (Location 1774)
Another is that pessimists often extrapolate present trends without accounting for how markets adapt. (Location 1775)
There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways. (Location 1779)
Threats incentivize solutions in equal magnitude. (Location 1794)
A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore. (Location 1795)
There are lots of overnight tragedies. There are rarely overnight miracles. (Location 1796)
Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant. (Location 1819)
It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together. (Location 1820)
In investing you must identify the price of success—volatility and loss amid the long backdrop of growth—and be willing to pay it. (Location 1833)
“My expectations were reduced to zero when I was 21. Everything since then has been a bonus,” (Location 1837)
Expecting things to be bad is the best way to be pleasantly surprised when they’re not. (Location 1840)
In 2007, we told a story about the stability of housing prices, the prudence of bankers, and the ability of financial markets to accurately price risk. In 2009 we stopped believing that story. That’s the only thing that changed. (Location 1863)
But stories are, by far, the most powerful force in the economy. They are the fuel that can let the tangible parts of the economy work, or the brake that holds our capabilities back. (Location 1872)
The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true. (Location 1875)
There are many things in life that we think are true because we desperately want them to (Location 1880)
“appealing fictions.” They have a big impact on how we think about money—particularly investments and the economy. (Location 1881)
They are extremely powerful. They can make you believe just about anything. (Location 1883)
