Thread by @OrtegaTalks

.@morganhousel has an interesting article on the Psychology of Money. I have summarised my key takeaways:::

A THREAD:::👇👇👇

"investing is not the study of finance. It’s the study of how people behave with money."

"Behavior is hard to teach, even to really smart people. You can’t sum up behavior with formulas to memorize or spreadsheet models to follow."

"Behavior is inborn, varies by person, is hard to measure, changes over time, and people are prone to deny its existence, especially when describing themselves."

"Managing money isn’t necessarily about what you know; it’s how you behave."

"The finance industry talks too much about what to do, and not enough about what happens in your head when you try to do it."

"There are 20 flaws, biases, and causes of bad behavior that pop up often when people deal with money."

"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."

"The line between bold and reckless is thinner than people think, and you cannot believe in risk without believing in luck."

"Luck and risk are the simple idea that sometimes things happen that influence outcomes more than effort alone can achieve."

"Not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself."

"Cost avoidance syndrome: A failure to identify the true costs of a situation, with too much emphasis on financial costs while ignoring the emotional price that must be paid to win a reward."

"If you want success, figure out the price, then pay it. It sounds trivial and obvious, but if you unpack the idea it has extraordinary power."

"Rich man in the car paradox: 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.”

"A tendency to adjust to current circumstances in a way that makes forecasting your future desires and actions difficult, resulting in the inability to capture long-term compounding rewards that come from current decisions."

"First rule of compounding: Never interrupt it unnecessarily. But how do you not interrupt a money plan – careers, investments, spending, budgeting, whatever – when your life plans change? It’s hard."

"Anchored-to-your-own-history bias: Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works."

"When everyone has experienced a fraction of what’s out there but uses those experiences to explain everything they expect to happen, a lot of people eventually become disappointed, confused, or dumbfounded at others’ decisions."

"Current [investment] beliefs depend on the realizations experienced in the past.”

"Historians are Prophets fallacy: Not seeing the irony that history is the study of surprises and changes while using it as a guide to the future. An overreliance on past data as a signal to future conditions in a field where innovation and change is the lifeblood of progress."

"An over-admiration of people who have been there, done that, when it comes to money. Experiencing specific events does not necessarily qualify you to know what will happen next. In fact it rarely does, because experience leads to more overconfidence than prophetic ability.

"The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tends to be stable in time."

"The seduction of pessimism in a world where optimism is the most reasonable stance."

"Real optimists don’t believe that everything will be great. That’s complacency. 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."

"Underappreciating the power of compounding, driven by the tendency to intuitively think about exponential growth in linear terms."

"There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “This Guy Has Been Investing Consistently for Three-Quarters of a Century.” But we know that’s the key to the majority of his success."

Physicist Albert Bartlett put it: “The greatest shortcoming of the human race is our inability to understand the exponential function.”

Flaw Nine: Attachment to social proof in a field that demands contrarian thinking to achieve above-average results.

"The problem with viewing crowds as evidence of accuracy when dealing with money is that opportunity is almost always inversely correlated with popularity. What really drives outsized returns over time is an increase in valuation multiples."

" Most attempts at contrarianism is just irrational cynicism in disguise – and cynicism can be popular and draw crowds. Real contrarianism is when your views are so uncomfortable and belittled that they cause you to second guess whether they’re right."

Flaw 10: An appeal to academia in a field that is governed not by clean rules but loose and unpredictable trends.

Flaw 11: The social utility of money coming at the direct expense of growing money; wealth is what you don’t see.

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

"When most people say they want to be a millionaire, what they really mean is “I want to spend a million dollars,” which is literally the opposite of being a millionaire. This is especially true for young people."

Flaw 12: A tendency toward action in a field where the first rule of compounding is to never interrupt it unnecessarily.

"When volatility is guaranteed and normal, but is often treated as something that needs to be fixed, people take actions that ultimately just interrupts the execution of a good plan. “Don’t do anything,” are the most powerful words in finance."

Flaw 13: Underestimating the need for room for error, not just financially but mentally and physically.

Ben Graham once said, “The purpose of the margin of safety is to render the forecast unnecessary.”

"People underestimate the need for room for error in almost everything they do that involves money."

Flaw 14: A tendency to be influenced by the actions of other people who are playing a different financial game than you are.

"Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games."

Flaw 15: An attachment to financial entertainment due to the fact that money is emotional, and emotions are revved up by argument, extreme views, flashing lights, and threats to your wellbeing.

"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."

Flaw 16: Optimism bias in risk-taking, or “Russian Roulette should statistically work” syndrome: An over attachment to favorable odds when the downside is unacceptable in any circumstance.

"Few things in money are as valuable as options. The ability to do what you want, when you want, with who you want, and why you want, has infinite ROI."

Flaw 17: A preference for skills in a field where skills don’t matter if they aren’t matched with the right behavior.

Flaw 18: Denial of inconsistencies between how you think the world should work and how the world actually works, driven by a desire to form a clean narrative of cause and effect despite the inherent complexities of everything involving money.

"Accepting that everything involving money is driven by illogical emotions and has more moving parts than anyone can grasp is a good start to remembering that history is the study of things happening that people didn’t think would or could happen."

Flaw 19: Political beliefs driving financial decisions, influenced by economics being a misbehaved cousin of politics.

Flaw 20: The three-month bubble: Extrapolating the recent past into the near future, and then overestimating the extent to which whatever you anticipate will happen in the near future will impact your future.

"Believing that what just happened will keep happening shows up constantly in psychology. We like patterns and have short memories. The added feeling that a repeat of what just happened will keep affecting you the same way is an offshoot."

"The stock market falling 40% in 2008 was followed, uninterrupted for years, with forecasts of another impending plunge. Expecting what just happened to happen soon again is one thing, and an error in itself."

"Most of the time, something big happening doesn’t increase the odds of it happening again. It’s the opposite, as mean reversion is a merciless law of finance."