“Everyone makes crazy decisions about money, but no one is crazy…” 

❗ One-Liner

Easy-read finance book about how culture and individual psychology affect our investment decisions and the overall economy.

😎 Writer and Other Works:

Morgan Housel also wrote “Everyone Believes It; Most Will Be Wrong”

💭 Thoughts about the Book:

I really love the book as the concepts were both relevant and easy to digest for both seasoned readers of similar books and for non-economic/finance savvy readers. Ideas were explained well through real-life examples using layman’s terms without dumbing down the concepts too much.

As money is a crucial part of everyday life, I believe this is a book that everyone should read. Unlike other economic or finance books which lean more on the technical aspects of money, this book focuses more on how personal behavior and culture affect our decisions towards investments. Through understanding the relationship between psychology and money, we could hopefully make better investments and better prepare ourselves for unprecedented times.

😍 You would love this if you were:

1. New to #adulting
2. In college studying economics, finance, or business
3. Casually looking for financial management guides
4. Interested in the history of modern finance and capitalism.

🤔 Books I’m reminded of:

1. Freakonomics (2005) by Steven Levitt and Stephen Dubner.
2. Everybody Lies (2017) by Seth Stephens-Davidowitz.

Like the Psychology of Money, these books give fascinating insights into how human behavior affects the economy and the world in general.

📝 Bullet Notes:

Disclaimer: Here are some of the insights I’ve gathered while listening to the audiobook. Note that these are not chapter-chapter summaries and do not reflect every concept discussed in the book. These are just my personal notes that I was able to jot down which I think could be of value to other people. Some of the words here are taken directly from the book, while most are smeared with my own understanding and insights on the passages.

On Logic:

• What seems logical for you, may not be logical for others. Based on studies, the majority of people who buy lotto tickets are from poor-income households. It might sound illogical that those who can only afford so much a week, are willing to spend the majority of their cash on lotto tickets. However, we should consider that what the majority of us take for granted (education, healthcare, and insurance) are basically impossible for the poorest of the poor. Even if the poor, living below minimum wage, save portions of their money for 10 to 50 years, it might still not be enough to send their kids to college. Hence, if they ever wish to escape poverty, investing in lotto tickets makes logical sense.
• Studies have shown that our investment decisions greatly depend on what we experience during our early adult life. If we grew up during times of booming stock markets, we tend to invest predominantly in stocks throughout our life even though bonds may be a better option.
• Our experience constitutes only 0.001% of what is happening to the world, but we use this to explain 80% of everything. We must be wary of this generalization as our experiences are most of the time not an excellent heuristic to make sound decisions.
• In finance, even an uneducated person can outperform a well-educated graduate student. (Based on a real account) Given enough time, a janitor’s investment in blue-chip stocks while using simple dollar-cost averaging can outperform the portfolio of even a sophisticated Hedge Fund manager who uses complex models and technical analysis.
• It is to note that modern finance has only been created after the second world war. Hence, as of this day, no one is really an expert and everyone is just winging it.

On Luck and Success:

• Luck and risk are two sides of the coin; these two play a vital role in our investment success. However, as we are yet able to accurately quantify them properly, our investment models are still incomplete. Where you were born, how supportive your family is, who your connections are, greatly affect the success of your investments.
• The wall between Cunning and Reckless is only a millimeter thick. With a few ounces of bad luck, a person could easily end up on the other side of a story. Innovator to criminal. Success to failure. 
• Cornelius Vanderbilt, a business magnate who pioneered US railroads during the 1850s, frequently ignored the law during his construction projects. But as he got away with it, he was regarded throughout history as savvy, cunning, and hardworking. But with a little bad luck, Vanderbilt could have easily ended up like Bernie Madoff – locked in prison and stripped of power and wealth.
• We cannot attribute success to hard work alone. We should always consider luck in the mix. We should be easy on ourselves when we fail because most of the time it is just bad luck. And we should be humble because our successes are primarily a result of good luck.
• No matter how hard we emulate successful people, we can never be Bill Gates nor Steve Jobs because we don’t have the luck they had. These people are not outliers because they’re billionaires, they are billionaires because they’re outliers. This is why, if we are aiming for guaranteed financial success, it is actually unwise to copy their strategies and life decisions. A better strategy is to study the median population and find common success stories that are highly replicable for anyone in any socio-economic class.

On Unprecedented Events:

• What moves the economy drastically are unprecedented events (WWII, Covid-19, Housing Bubble). No matter how much we forecast, needle movers will always be unprecedented. That’s why they are needle movers in the first place because not even experts can anticipate them.
• As forecasting is creating expectations based on past data and known events, forecasting is somewhat useless when dealing with unprecedented events. If an event already happened before, then it will not surprise us. If it does not surprise us, then it will not be a needle mover. Hence, when analyzing risk and mitigations, it is important that we become prepared not only on the worst-case scenario we can imagine but also on the fact that we will be unprepared when the next big thing hits us.

On Psychology and Bubbles:

• Doing well with money has little to do with how smart you are and a lot to do with how you behave.
• The challenge with people is not that we’re greedy, but that we blindly follow what other people are doing with their investments due to herd mentality.  In the face of surging asset prices, even the most prudent long-term investor could be tempted to join in the hype.
• Bubbles are generally built when asset prices are dictated by short-term investors who are looking to sell early. The value of an asset grows exponentially just because of hype.
• An issue in investing is that we are all playing different games, but we all use the same toys. As both long-term and short-term investors (players) could purchase the same asset (toy), an asset’s value can be muddled by different investing strategies (games) being played on it simultaneously.
• Pessimism is a more powerful force than good news. The average person sells stocks quickly given a sliver of bad news but is generally cautious when buying stocks unless it has already formed into a bubble.
• The economy is affected by the narrative we tell ourselves. News of an impending recession (even if untrue) may cause people and businesses to sell stocks, spend less, and lay off workers, even if the number of jobs stays the same, infrastructures remain intact, and raw material supplies remain stable.