The Psychology of Money

Introduction

In The Psychology of Money, Morgan Housel explores the strange ways people think about money through 19 short stories.

• These stories teaches you how to make better sense of one of life's most important topics.
• Morgan Housel argues that personal financial success is less about what you know and more about how you behave.

No One is Crazy

People from different generations, raised by parents with varying incomes and values, born into diverse economies, and experiencing job markets with different incentives and degrees of luck, learn vastly different lessons.

• Everyone has a unique experience shaping their understanding of how the world works. What you have experienced is inherently more compelling than second-hand knowledge.
• Therefore, everyone develops a distinct set of views about money, leading to significant variation from person to person.
• For example, someone raised in poverty might approach risk and reward in ways a wealthy banker's child could never truly comprehend. Similarly, those who lived through the Great Depression likely have a deeper understanding of hardship than someone born in a time of prosperity.

Studying history can provide a sense of understanding, but without personally experiencing the consequences, you may not grasp it deeply enough to change your behaviour. Some lessons require first-hand experience for true comprehension.

• We all believe we understand the world, but our experience is just a fragment.
• Despite their differences, these life experiences are all equally valid and persuasive, shaping our beliefs, goals, and financial forecasts.
• Those who grew up during a strong stock market tend to invest more heavily in stocks later in life, compared to those who witnessed a weak market.

Every financial decision, even when based on incomplete information, bad marketing, or misjudgement, makes sense to the person making it in that moment. They are checking their own boxes.

• Buying lottery tickets might seem perfectly reasonable to mostly poor people who are living pay cheque to pay cheque. Higher wages and saving seem unattainable, while a lottery ticket offers a tangible dream of acquiring luxuries like vacations, new cars, health insurance, or safe neighbourhoods.
• They are essentially paying for a dream, a concept you might not understand if you already live comfortably. That is why they might buy more tickets than you do.

Luck and Risk

Luck and risks are siblings.

• They both reflect the reality that life's outcomes are often influenced by forces beyond our individual control (effort).
• However, nothing is as good or as bad as it seems.
• To illustrate, by sheer luck, Bill Gates attended Lakeside School, which had a Teletype Model 30 computer, a rarity at the time. Out of roughly 303 million high-school-aged people globally, Gates ended up in this fortunate position and co-founded the multi-trillion dollar Microsoft company. On the other hand, Gates' best friend, Kent Evans, shared his passion for computers, business acumen, and ambition. Tragically, Evans died in a mountaineering accident before graduating high school (the odds of such an event are roughly one in a million). The same force, the same magnitude, working in opposite directions.

We are but a single player in a vast game with billions of others and countless moving parts.

• The accidental impact of actions outside of your control can be more sequential than the ones you consciously take.
• Quantifying luck is difficult, and attributing success solely to it can be dismissive. Therefore, the tendency is to simply ignore luck's role in achievement.
• Nonetheless, the quality of education and opportunities available are undeniably linked to one's socioeconomic background.

Of course, some failures are due to insufficient effort (e.g. not try hard enough or laziness), poorly planned investments, or a lack of direction. But how much?

• It is nearly impossible to pinpoint the exact ratio of actions that can be replicated versus the influence of random chance and luck that nudged those actions in a particular direction.
• 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.
• The ultimate outcome (success or failure) can shape our perception of a company. A company that frequently bends the rules might be seen as no better than a thief or, conversely, as a necessary force for innovation that should not be hindered by outdated laws.
• Yet, our brains crave simple explanations, disliking nuance. We seek to identify traits to emulate or avoid.
• Hence, be discerning in your praise and criticism. Do not assume 100% of outcomes are due to effort and decisions. Not all success is earned solely through hard work, nor is all poverty the result of laziness.

Studying isolated cases can be misleading.

• We gravitate towards extremes – billionaires, CEOs, or spectacular failures that dominate the news. These extremes, due to their complexity, are often the least applicable to our own lives. The more extreme the outcome, the less likely its lessons are relevant to you, as extreme luck or risk often played a significant role.
• Look for broader patterns of success and failure to gain actionable insights. The more common the pattern, the more applicable it might be to your situation.

Success is a deceptive teacher. It can lull even intelligent people into thinking they are invincible. The same is true for failure. It can trick smart people into believing their decisions were inherently bad, when sometimes they were simply casualties of the unforgiving nature of risk.

• When dealing with failure, the key is to structure your finances in a way that allows you to recover from setbacks (e.g. bad investment or missed financial goal). This way, you can keep playing the game until the odds swing in your favour.
• But even more importantly, acknowledging the role of luck in success also necessitates self-forgiveness and understanding when judging failures.

Never Enough

In modern capitalism, there seems to be no limit today on what "enough" entails.

• Even those who achieve wealth, prestige, success, and power often strive to surpass their peers, driven by envy.
• However, the ceiling of social comparison is so high that virtually no one will ever reach it.
• This relentless pursuit is a battle that can never be won, or perhaps the only way to win is to not fight to begin with - to accept that you might have enough, even if it is less than those around you.

There are dangers in not having a sense of "enough." An insatiable appetite for more can push you to a point of regret.

• The desperation for ever-increasing wealth can lead us to risk everything in pursuit of more, potentially driving us to unethical acts like crime.
• It sounds foolish to gamble what you already have and need for something you do not have and do not truly need.
• There are many things that are never worth risking, regardless of the potential gain.
• Reputation, freedom, independence, family, friends, the love of those you cherish, and happiness are all invaluable.

Remember, the most difficult financial skill to master might be learning to stop moving the goalposts.

• If your expectations constantly rise as you achieve results, there is no point in striving for more.
• You will simply feel the same dissatisfaction after putting in extra effort, creating an endless cycle of chasing money, power, and prestige.
• Knowing when you have "enough" is crucial.
• Life is not any fun without a sense of enough. Happiness is just results minus expectations.

Confounding Compounding

Compounding, where small growth fuels future growth, can lead to extraordinary results that seem to defy logic.

• This snowball effect is evident in the Milankovitch Cycles theory, which explains ice ages. Gradual changes in Earth's orbit and tilt lead to summers that do not melt all the winter snow. This leftover snow accumulates, reflecting more sunlight and causing a global cooling effect.
• It is a powerful example of how small changes, compounded over time, can have a dramatic impact.

Similarly, with money, investing and saving from childhood can accumulate more wealth than spending your teens and 20s exploring the world and finding your passion.

• Warren Buffett's success demonstrates that building wealth is less about exceptional investment skills and more about mastering compounding through an early start and a focus on long-term, consistent growth.
• Take Jim Simons, for instance. While he achieved a higher annual compounded rate (estimated at 66% compared to Buffett's 22%), his current wealth is lower since he did not find his investment stride until 50 years old.

The results of compounding may seem counterintuitive because our brains are wired for linear thinking, not exponential growth.

• Therefore, good investing is not necessarily about chasing the highest returns, but rather earning good, consistent returns that you can stick with over the long term.

Getting Wealthy vs Staying Wealthy

There are millions of ways to get wealthy, but there is only one way to stay wealthy: some combination of frugality and paranoia that fosters a sense of sensible optimism in long-term.

• Acquiring wealth often requires taking risks, embracing optimism, and putting yourself out there.
• However, keeping wealth demands the opposite approach to risk-taking. It requires humility, and a fear that what you have built can be taken away from you just as fast. It requires frugality and an acceptance that at least some of your success is attributable to luck, so past achievements cannot be relied upon to repeat indefinitely.

When it comes to money, a survival mentality is absolutely key, even more important than chasing rapid growth or relying solely on intelligence.

• The ability to preserve over time, without suffering financial ruin or being forced to give up, makes the biggest difference.
• This should be the cornerstone of your strategy, whether it is in investing or your career or a business you own.

After all, compounding only works if you can give an asset ample time to grow.

• Extraordinary growth requires surviving all the unpredictable ups and downs that everyone inevitably experiences over time (reality of a future filled with unknowns), such as 9/11 terrorist attacks and COVID-19.
• Therefore, the most important part of every plan is to plan for the unexpected (having a well-defined back-up plan in place for when things do not go according to plan). There should be enough room for error (often called margin of safety) to absorb potential setbacks.

Tails, You Win

It is quite normal for many things to fail, including works of art, businesses, and investments.

• However, what matters most are the long tails – the extreme ends of the outcome distribution – where a small number of events can account for the majority of the results.
• By the mid-1930s, Disney had produced over 400 cartoons. While most were beloved, they lost a fortune. It was not until Snow White and the Seven Dwarfs brought in an order-of-magnitude increase in earnings that the company finally paid off its debts.
• In 2018, a whopping 7% of the index's gains came from just Apple, largely driven by their mega-hit product, the iPhone.

Anything that achieves immense success, profitability, fame, or influence is the result of a "tail event" – an outlier that occurs extremely rarely, perhaps once in thousands or millions of attempts.

• To illustrate, most startups (and even public companies) fail, and the world only allows for a few mega-successes.
• Nonetheless, we tend to pay the most attention to these powerful outcomes, overlooking their rarity.

Brilliant investors and entrepreneurs can still make mistakes.

• However, success often hinges on rare, "tail" events, not consistent perfection.
• In other words, a few big wins can outweigh a lot of smaller losses.
• This lack of intuition stems from our limited view: we only see the final product, the peak of success, not the hidden struggle and countless failures that usually precede it.

Freedom

Many people pursue wealth with the hope of finding happiness. However, while happiness is unique to each individual, a common thread seems to be the desire for control over one's life.

• The ability to do what you want, when you want, with who you want, for as long as you want, is truly priceless. It is the highest dividend money pays.

Building wealth, bit by bit, allows you to achieve a level of independence and autonomy. Unspent assets grant you greater control over your time and actions.

• A small amount of wealth provides a crucial benefit: the ability to take a few days off work when you are sick without financial stress.
• 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.
• Six months' emergency expenses means not being terrified of your boss, because you know you would not be financially strapped if you have to take some time off to find a new job.
• Furthermore, having more wealth allows you to take a job with lower pay but flexible hours, perhaps one with a shorter commute. Or, you can deal with a medical emergency without the added burden of worrying about how you will pay for it.
• Ultimately, financial security allows you to retire when you want, not when you have to.

Sadly, we have often used our greater wealth (our time) to buy more and better possessions.

• However, these material gains often provide fleeting satisfaction and potentially add stress from upkeep and debt.

In contrast to past generations whose jobs were primarily manual labour, today's professional work requires a heavy focus on mental effort, involving constant thinking and decision-making.

• Managers, officials, and professionals often find themselves constantly thinking about work, even while commuting, taking care of family, or during their personal time.
• Smartphones and laptops, while offering flexibility, can also blur the lines between work and personal life, making it seem like we can (and should) be working anytime, anywhere.
• Consequently, our control over time has diminished, and we should not be surprised that people do not feel much happier even though we are, on average, richer than ever.

Man in the Car Paradox

Many people pursue wealth with the hope that it will signal intelligence and success, leading to admiration and respect from others.

• However, the irony is that those other people often bypass admiring you.
• Instead, they use your wealth as a benchmark for their own desire to be liked and admired.
• The subconscious thought is "Wow, if I had that car, people would think I'm cool."

No one is impressed with your possessions (e.g., house, jewellery, clothes, cars) as much as you are.

• On the other hand, humility, kindness, and empathy will bring you more respect.

Wealth is What You Don't See

We tend to judge wealth and financial success solely by outward appearances.

• For instance, we often intuitively assume the owner of a luxury car or house is rich, even if we pay them little attention.
• However, this was not always the case. Many seemingly successful (rich) people spend a large portion of their income on luxuries.

True wealth lies in financial assets that have not yet been converted into material possessions (e.g., cars, diamonds, watches, clothes).

• Its value lies in offering you options, flexibility, and the potential to grow your money over time, allowing you to buy more in the future than you can right now.
• Spending money to show people how much money you have is the fastest way to have less money.
• Owning a $100,000 car simply means they have $100,000 less than they did before they bought the car, or potentially even $100,000 more in debt.
• When many people say they want to be millionaires, they might actually mean "I'd like to spend a million dollars." This, however, is the opposite of being a millionaire.

Wealth requires self-control; It is the difference between what you can do with your money and what you choose to do.

• Of course, there are wealthy people who spend a lot on possessions. But even then, what we see is their richness, not necessarily their wealth. We see the houses they bought, not the even bigger houses they could have afforded.

Save Money

Once income reaches a certain level, people tend to fall into three categories:

• Savers
• Those who believe they cannot save
• Those who feel they do not need to save

The first idea - simple, but easy to overlook - is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.

• Here's an analogy: The oil crisis of the 1970s was overcome by building more energy-efficient cars, factories, and homes. Finding new energy sources is often uncertain and uncontrollable. However, using energy more efficiently is entirely within our control.
• The same applies to money. Investment returns can build wealth, but the success of any strategy and market cooperation are always uncertain. Personal savings, on the other hand, are entirely under your control and guaranteed to be just as effective in the future as they are today.

Wealth is simply what remains after you spend your income. More importantly, its value is relative to your need.

• Even without a high income, a higher savings rate allows you to build wealth by spending less to live comfortably and happily.
• However, it is a daily struggle between desires (driven by personal ego to keep up with others) and actual needs.

Saving without a specific goal provides options and flexibility.

• It allows you to wait for the right opportunity, pursue your passions at your own pace, and even change course entirely on your own terms.
• This newfound freedom comes from reducing your spending by focusing on what truly matters to you, rather than what others think of you.

Reasonable Rational

Humans are not spreadsheets, but complex emotional beings.

• When making financial decisions, do not aim to be coldly rational. Aim for reasonableness, which increases your chance of sticking with it in the long run.
• Our emotions can influence our financial decisions, similar to how some people might take a fever-reducing pill for comfort even though a fever can be beneficial in fighting infections.

Academic finance focuses on finding the mathematically perfect investment strategies.

• However, humans are neither purely rational nor completely irrational. Instead, we strive to be reasonable with our money, which means making informed decisions while acknowledging our emotional influences.
• A great example: pursuing your passion can provide the motivation and resilience needed to overcome the odds stacked against success.
• When a company you're passionate about and invested in loses money, you are more likely to persevere than if you had no emotional connection.
• The "home bias" concept describes people's preference to invest in companies from their home country.

Surprise!

Things that have never happened before happen all the time.

• While history is mostly a study of surprising events, it can still help us calibrate our expectations, identify common pitfalls, and offer a rough guide to what has worked in the past.
• But history is not, in any way, a map of the future.
• While major historical events like the Great Depression, World War II, or the dot-com bubble offer valuable lessons, they are outliers – rare occurrences that may not be directly applicable to predicting the future.
• The future thrives on innovation and change, constantly rewriting the rules of the game.
• The further back you look in history, the more general your takeaways should be. These broader trends, like people's relationship to greed and fear, how they behave under stress, and how they respond to incentives, tend to be more stable across time.

This unpredictable nature extends to the world of investing.

• Investing is not a hard science.
• It is a complex game where imperfect decisions are made with limited information about things that significantly impact well-being, leading even smart investors to experience fear, greed, or paranoia.

A dangerous trap in finance is overvaluing the wisdom of those who have "been there, done that."

• Experiencing specific events does not necessarily translate to future knowledge.
• In fact, it often leads to overconfidence rather than accurate forecasting ability.
• After all, people's preferences for goods and services also constantly evolve with culture and generation.

Room for Error

Life is similar to playing a game of blackjack. We are playing a game of odds, not certainties.

• In any particular hand, we may think we have a good chance of being right, but we also know there is a decent chance that we are wrong.
• Betting too heavily even when the odds seem in your favour can be dangerous. Because if you are wrong, you might lose so much that you do not have enough money to keep playing.

Uncertainty, randomness, and chance – these ever-present unknowns are an inherent part of life.

• The only way to deal with them is by increasing the gap between what you think will happen and what can happen, while still leaving you capable of fighting another day.
• In other words, the most important part of every plan is planning for your plan not going according to plan. You have to give yourself room for error to withstand any swings of bad luck.

Room for error allows you to endure hardship and survive till odds of benefiting from a low-probability outcome to fall in your favour.

• When used appropriately, it allows you to take much more risk without worrying emotionally and to sleep well at night.
• The idea is that you have to take risks to get ahead, but no risk that can wipe you out is ever worth taking.
• In an interview, Benjamin Graham mentioned that "the purpose of margin safety is to render the forecast unnecessary".

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.

• Therefore, it is equally important to save for things you cannot possibly predict or even comprehend.

You'll Change

Long-term planning is harder than it seems because people's goals and desires change over time.

• As unpredictable as the future is, people tend to be surprisingly bad at predicting what they want (or what will make them happy) in the future.
• You may work very hard to become a doctor for 15 years, but the realistic life stress and hours may wear you down to the point of disappointment.
• In fact, only 27% of college graduates have a job related to their major.

The End of History Illusion, a psychological term, describes the tendency for people to be keenly aware of past changes, but to underestimate how much their personalities, desires, and goals are likely to change in the future.

• We make life-altering decisions throughout our lives, but when we reach those future selves, we sometimes regret them.
• For instance, some middle-aged couples choose to divorce the people who they rushed to marry as young adults.

We cling to the illusion that we have recently become the people we were always meant to be and will be for the rest of our lives.

• However, the reality is many of us change dramatically over a lifetime.
• The idea of doing the same thing, or something very similar, for decades does not appeal to us.

Here are two key considerations when making what seem like long-term decisions.

• We should avoid the extremes of financial planning, such as being happy with a very low income or choosing to work endless hours in pursuit of a high one. Both extremes lead to enduring regrets, either not having enough for retirement or looking back on a life spent solely chasing money. Throughout your career, aim to have a moderate annual savings and free time for family.
• We should also accept the reality that we may change our minds and adapt accordingly. Some of the most unhappy workers are those who stuck in careers chosen at 18. Embracing the idea of "no sunk costs". Otherwise, we become prisoners to our past selves.

Nothing's Free

Everything has a price, and the key to many things in life is simply figuring out what that price is and being willing to pay it.

• The problem is that the price of many things is not obvious until you experience them first-hand, often when the bill is already overdue.
• Similarly, every job seems easy when you are not the one doing it. The challenges faced by someone actively involved are often invisible to those in the crowd, observing from a distance.

Most things are harder in practice than in theory. This is partly because we are overconfident, but more often because we are not good at identifying the price of success, which prevents us from being able to pay it.

• "Hold stocks for the long run" sounds like good advice, but it is hard to maintain a long-term outlook when stocks are collapsing.
• Successful investing demands a price: volatility, fear, doubt, uncertainty, and regret. All of these are easy to overlook until you are dealing with them in real time.

To succeed in investing, you must accept the price of market volatility, uncertainty and possible losses.

• You need to be willing to pay this fee in exchange for the long-term growth the market offers, rather than as a fine or penalty to be avoided.
• Otherwise, you risk selling out during a downturn and missing out on potential gains.

You & Me

Financial bubbles such as dot-com bubble and housing bubble ruin lives.

• In hindsight, bubbles often appear fuelled by a combination of optimism, easy credit and the illusion of perpetually rising prices.
• Greed undoubtedly plays a role, but it is just one piece of the puzzle.
• After all, no one is crazy to make the decision to own an overvalued asset.

Depending on investors' different goals and time horizons, stock prices (like Google's) can have a different rational price.

• In a 30-year time horizon, the smart price to pay is determined by a sober analysis of Google's discounted cash flows and potential over the next 30 years.
• If you are looking to sell within a year, you will focus on Google's current product sales cycles and the possibility of a bear market.
• Therefore, prices that look ridiculous to one person can make sense to another.

In finance, money chases returns to the greatest extent that it can, resulting in sustained rise in asset prices, but not forever.

• The upward momentum of a bull market attracts short-term traders who assume it will continue, gradually shifting the investor landscape from long-term to short-term dominance.
• As a result, the dominant market price-setters becomes those with shorter time horizons who prioritize short-term gains.

In the same way, in housing bubble, it is hard to justify paying $700,000 for a two-bedroom Florida track home to raise your family in for the next 10 years.

• However, it makes perfect sense for someone planning to flip the home in a few months and capitalize on rising prices to make a quick profit.
• These flippers are unconcerned about long-term price-to-rent ratios or whether the prices they paid were backed up by long-term income growth. Their sole focus is on whether the price of the home will be higher next month than it is this month (and for many years, it was).

Bubbles form and inflict damage when long-term investors, playing by different rules, start taking their cues from those short-term traders playing a different game.

• Long-term investors, believing that other investors have inside information, proceed to purchase stocks at seemingly inflated price. After all, the high price was the only one available, and many people were buying in.
• However, the high price was reasonable for the short-term traders who planned to sell the stock before the end of the day (when the price would likely be higher). This created a potential disaster for long-term investors who plan to hold shares for a much longer period.

Similarly, being swayed by people playing a different game can also throw off how you think you are supposed to spend your money.

• While we can see how much money other people spend on cars, homes, clothes, and vacations, we do not get to see their goals, worries and aspirations.
• For example, a young lawyer, aiming to be a partner at a prestigious law firm, needs a more polished appearance than someone in a less image-conscious profession (such as writer).
• However, when his expensive purchases set our own expectations, we are wandering on a path of potential disappointment, because we are spending money we might not have, without the career boost that justifies it.

The crucial lesson here is to identify your investment game - your time horizon.

• Avoid getting swept up in the actions of those playing by different rules.

The Seduction of Pessimism

True optimists do not believe that everything will be great. That is complacency.

• Optimism is a belief that the odds of a good outcome are in your favour over time, even when there will be setbacks along the way.

While optimism is often seen as the recommended approach, pessimism holds a special place in our heart.

• Pessimism often sounds smarter and attracts more attention than optimism, which is often viewed as being oblivious to risk.
• It is even considered acceptable to be pessimistic about the economy, or even indulge in apocalyptic visions.
• On the other hand, optimism pronouncements like "good times are ahead" or "a company has huge potential" can sound like a sales pitch or comically aloof of risks.
• Therefore, the investing newsletter industry is now populated by prophets of doom despite operating in an environment where the stock market has gone up 170,000 fold in the last century (including dividends).

When dealing with money, pessimism is seductive.

• Psychologist Daniel Kahneman's concept of loss aversion suggests that organisms prioritize avoiding losses (threats) as more urgent than seeking gains (opportunities), thus increasing their chances of survival and reproduction.
• As money is ubiquitous, a negative event tends to affect everyone and captures all the attention.
• Investors tend to question why economic growth went down rather than celebrate the growth itself.
• Furthermore, pessimists often extrapolate present trends without accounting for how markets, driven by supply and demand, can adapt.
• Threats incentivize solutions in equal magnitude.
• Progress happens too slowly to notice, but setbacks happen too quickly to ignore.
• There are lots of overnight tragedies, but there are rarely overnight miracles.
• News is dominated by sudden tragedies like terrorism, plane crashes, and natural disasters.
• In contrast, advancements like medical breakthroughs or the success of the first airplane (which took nearly four and a half years after the Wright brothers' first flight to achieve) do not happen overnight.
• Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about.
• Expecting things to be bad is the best way to be pleasantly surprised when they are not. Which, ironically, is something to be optimistic about.

When You'll Believe Anything

In 2007, a pervasive story dominated the financial world: a belief in the stability of housing prices, the prudence of bankers, and the ability of financial markets to accurately price risk.

• In 2009, that story crumbled. Once the belief in ever-rising home prices shattered, a domino effect began. Mortgage defaults surged, leading to bank losses. Banks then restricted lending to businesses, triggering layoffs, decreased spending, and a vicious cycle of further layoffs.
• Other than clinging to a new narrative, we had an identical - if not greater - capacity for wealth and growth in 2009 as we did in 2007.
• Stories are, by far, the prevailing force in the economy. They act as the fuel that propels the tangible parts of the economy (businesses, investments, and careers) forward, or the brake that restricts our potential.

At the personal level, there are two key things to keep in mind about navigating a story-driven world when managing your money.

The more you desire something, the more likely you are to believe a story that overestimates the odds of it being true.

• Many of us hold onto appealing fictions - stories that are highly desirable but lack evidence or common sense.
• Remember, investing is one of the few fields that offers the possibility of significant rewards, but the chances are slim.
• Some people, desperately wanting their lives to change, pay close attention to TV investment commentary on stock picking, even though the odds of success are low.
• Conversely, if you believe a recession is imminent and sell your stocks in anticipation, your view of the economy will become distorted by your desired outcome.

Everyone has an incomplete understanding (view) of the world, but we create complete narratives to fill the gaps.

• Concepts like bills, budgets, careers, promotions, and saving for retirement are entirely foreign to a young child.
• Despite his limited knowledge, a young child does not wander around in confusion. Instead, he constructs his own internal narrative about how things work, such as blankets keeping him warm and his father going to work because he does not want to play.
• Like a child, adults also seek the most understandable explanations for everything we encounter, even if these assumptions, based on our unique perspectives and experiences, might be wrong.
• We all crave a sense of order in the complex world around us. The illusion of control is far more appealing and persuasive than the reality of uncertainty.
• This false sense of control can lead to overconfidence in forecasting the stock market and economy, causing us to make risky decisions we do not fully grasp.

Summary

The Psychology of Money is a truly thought-provoking book that explores the behavioural aspects of financial planning.

• It uses vivid and concrete examples to illuminate the often-unguided path to wealth.
• However, the book emphasizes achieving financial independence as a means to live life on your own terms, rather than a relentless pursuit of ever-greater riches.

Nonetheless, when it comes to financial advice, no one can tell you what to do with your money.

• Our individual goals, desires, and priorities determine the best approach for each of us. There is no single right answer, just the one that works for your unique circumstances.
• This is similar to the relationship between a doctor and a patient. While the doctor possesses the knowledge and understands the success rates of various treatments, the patient's specific situation and preferences ultimately influence the chosen course of action.