The Psychology of Money — by Morgan Housel
One of the ideas that stood out the most to me is that reasonable>rational. I definitely tend towards being overly rational to the point where I optimize for the wrong things. He gives a few good examples in the book:
- Using fevers to treat diseases. Despite being an effective and arguably the most rational solution, hospitals don't use them because inducing a fever causes pain to the patient.
- "It may be rational to want a fever if you have an infection. But it's not reasonable."
- Another example was using leverage at a 2-1 margin (two dollars of debt for every dollar of your own money) is the rational solution for retirement accounts (argued in some 2008 paper). Even if the market drops 50% and you have nothing, the researchers still showed that people would be better off if they immediately started following the plan again the day after being wiped out. This is rational but not reasonable. Housel argues that "no normal person could watch 100% of their retirement account evaporate and be so unfazed that they carry on with the strategy undeterred"
I think a lot of people fall victim to the rationality trap. Using his framing, rationality isn't the problem it is just that rational thinking tends to optimize for variables that can be measured, while neglecting equally (or even more) important variables that are harder to quantify. The "reasonable" strategy is really just being rational about the variables that you truly value.
Another quote that stood out to me was actually a quote from someone else:
"Your Kids don't want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them" - Pillemer
This is a trap that I think a lot of people fall into in an attempt to rationalize their desire to work more and accumulate resources. This is a pretty common trope in movies especially for the male characters who, after being asked to spend more time at home, tell their family "I'm doing all of this for you!" While monetary aid can definitely help a family by allowing them to get a good education, much of the benefits of money are to spend less time working and more time with your family. People often rationalize their desires for status and their lack of desire to spend time with their family by telling themselves that they are making a sacrifice for everyone.
A third idea that I had heard before (probably from Derek Sivers) but that was articulated particularly well in this book was the idea that it is far easier to decrease your ego (or your desire for certain material possessions) than it is to increase your actual income. Once you get past fulfilling your basic needs, the majority of the benefit of money comes from not spending it (another idea from the book). Housel argues that savings rate matters more than return rate, so the easiest way to increase wealth is to save more, and the easiest way to save more while still being satisfied is to just want less. I think this distinction is important. The goal isn't to be miserable and save as much as possible; it is to adjust your expectations and desire so that you are happy to live at a lower income tier. I really like this idea and am trying to apply it more in my life. It also reminds me of Kevin Kelly's experiment where he occasionally lives on as little money as possible to ensure that his "needs" don't expand to include nice-to-haves and so he is more appreciative what he can add back after the period is over.
Here are some of my other notes:
- Saving and investing for a long time matters more than almost anything else. Time and savings rate, more than annual return is what creates wealth
- You don't have to have a reason to save. Everyone should be saving so that eventually they have the power to do what they want, when they want, for as long as they want.
- When people buy fancy possessions what they usually want is respect and admiration. You're more likely to get those things through kindness and humility than through accumulating possessions, so save and be kinder.
- You don't have to be right all the time in business. You only need to be really right a few times and not let being wrong cost you everything
- When you make a mistake, instead of thinking that you'll never make that mistake again, realize that you did not anticipate that the world is difficult to anticipate. The correct lesson is: the world is surprising.
- People often use events like the Great Depression to guide their thinking on worst-case scenarios, but in reality those events had no precedent when they occurred. When people believe the worst and best events of the past will match the worst and best events of the future, they're assuming that the history of unprecedented events doesn't apply to the future.
- Good ideas taken too far are indistinguishable from bad ideas. Having room for error acknowledges that uncertainty, randomness, and chance are an ever-present part of life. The only way to deal with them is to increase the gap between what you think will happen and what can happen.
- "the purpose of the margin of safety is to render the forecast unnecessary" - Benjamin Graham
- Take risks but never to the point where you could lose everything. Always ensure that you stay in the game.