By Benjamin Kwong — Mar 7, 2023

Book Summary: The Psychology of Money

Timeless lessons on wealth, greed, and happiness

📖 The Book in 3 Sentences

Everyone has their own experience of how the world works and their perpsective, ego, and emotion influence decisions on how they use their money
Knowing how to retain and endure, achieve growth via compounding interest, investing reasonably with a margin for error are a set of skills that can be learnt
Through our life the world and our own self changes and evolves which can change the way we think about and use money and have an impact on our ability to control how we live our lives

🖼 Impressions

This book helped me to understand the relationship we have with money and our behaviors with it in personal finance, investing and business. There are key lessons in this book to help readers better manage and make better decisions with their money.

👥 Who should read it?

Money is a key component of our lives and we should all better understand the thinking behind how we spend, save and invest it. You'll really enjoy this book if you:

Have goals around saving and investing money
Understand positive and negative habits around money

💡 How the book changed me

I now understand that people based on their life experiences have very different perspectives on money and how to handle it - I should not be quick to judge
At some point I have to think about what is "enough" money and normalize discussions about it
To not underestimate compounding
‌I now understand the power of tails and how in my own life I should take more "shots"
Having a certain amount of money buys me freedom and time - the control over my time is extremely valuable
Don't be so flashy, nobody cares about the materialistic fancy stuff
It's OK to save lots of money instead of spending it
Be reasonable with investments, prepare for suprises and allow a margin of error for things to go wrong

✍️ My Top 3 Quotes

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. If can be so logic-defying that you underestimate what's possible, where growth comes from, and what is can lead to.

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.

Money's greatest intrinsic value - and this can't be overstated - is its ability to give you control over your time. 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.

📒 Summary + Notes

Introduction: The Greatest Show On Earth

Chapter 1 - No One's Crazy

Your personal experiences with money make up maybe 0.000000001% of what's happened in the world, but maybe 80% of how you think the world works.

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 wiht different incentives and different degrees of luck, learn very different lessons.

Everyone has their own experience of how the world works. We should not judge people how they spend and invest their money.

Economists found that people's lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation - especially experiences early in their adult life.

1970's the S&P 500 increased 10 fold, 1950's market went nowhere. This caused two generations of people with completely different views of the stock market.

Another great example is the New York Times reporting on Foxconn's working conditions which Americans deemed as "Sweat Shops". These conditions were an upgrade for some Chinese workers who before Foxconn were engaged in prostitution.

Chapter 2 - Luck & Risk

Nothing is as good as or as bad as it seems.

Bill Gates went to Lakeside High school, met Paul Allen and went to one of the very high schools that had access to a computer.

Luck = Skills x Hardwork x Unfair Advantages

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.

Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. But realize 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.

Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

Chapter 3 - Never Enough

When rich people do crazy things.

Tells the story of Rajat Gupta ex CEO of McKinsey achieving a net worth of $100m after growing up as a teenage orphan in Kolkata and achieving enormous success. Rajat was not satisfied and wanted to be a billionaire. Sitting on the board of directors at Goldman Sachs he engaged in insider trading. Bernie Madoff actually made a solid 25-50m per year with his securities firm but yet he also engaged in fraud with his ponzi scheme.

There is no reason to risk what you have and need for what you don't have and don't need.

The hardest financial skill is getting the goalposts to stop moving.

Chapter 4 - Confounding Compounding

$81.5 billion of Warren Buffet's 84.5 billion networth came after his 65th birthday. Our minds are not built to handle such absurdities.

This chapter goes over the magic of compounding with some interesting examples.

Warren Buffet's net worth is $84.5 billion. $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for social security, in his mid 60's.

Chapter 5 - Getting Wealth vs. Staying Wealthy

Good investing is not necessarily about making good decisions. It's about consistently not screwing up.

Tells the stories of individuals who rapidly gain money and lose it all.

Getting money is one thing. Keeping it is another.

Acquisition of money requires taking risks, being optimistic and putting oneself out there.

Saving money requires the opposite where the fear of what you've made can be taken away from you.

Survival is attributed to money success.

Chapter 6 - Tails, You Win

You can be wrong half the time and still make a fortune.

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.

Walt Disney went bankrupt with his first studio, his films were expensive to produce and financed at outrageous terms. By the mid-1930's Disney had produced more than 400 cartoons most losing money. Snow White and the Seven Dwarves earned $8m in its first 6 months. Walt Disney had produced several hundred hours of film but it was 83 inutes of Snow White that made the difference.

Venture capital is a tail-driven industry. They expect at least half of their investments to fail.

The author uses the example of Sue, Jim, Tom. Sue comes out with the most money because she keeps her cool when the market is in recession and invests regularly and frequently. Jim and Tom sell during recessions or buy only out of recessions. It's important to keep one's cool through market volatility.

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.

Comedians also test their material in small clubs before incorporating their jokes for big shows. The good jokes we see are the tails that stuck out within hundreds of attempts.

At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffet said he's owned 400 to 500 stocks during his life and made most of his money on 10 of them. Charlie Munger followed up. "If you remove just a few of Berkshire's top investments, its long-term track record is pretty average".

"It's not whether you're right or wrong that's important," George Soros once said, "but how much money you make when you're right and how much you lose when you're wrong". You can be wrong half the time and still make a fortune.

Chapter 7 - Freedom

Controlling your time is the highest dividend money pays.

Angus Campbell psychologist at University of Michigan born in 1910 summed up: "Having a strong sense of controlling one's life is a more dependable predictor of positive feelings of well being than any of the objective conditions of life we have considered.

Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.

Karl Pillemer has a book 30 Lessons for Living and he found that people with decades of life experience valued quality friendships, being part of something bigger than themselves, and spending quality, unstructured time with their children. "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 writes.

Chapter 8 - Man in the Car Paradox

No one is impressed with your possessions as much as you are.

When you see someone driving a cool 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."

This is the paradox: people want wealth to signal to other 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.

Chapter 9 - Wealth is What You Don't See

Spending money to show people how much money you have is the fastest way to have less money.

We tend to judge wealth by what we see as it's the only outwards data point. Cars. Homes. Instagram. But the truth is wealth is what we can't see.

The only way to be wealthy is to not spend the money that you do have. Rich is current income - shown by cars and homes through monthly repayments require due to income levels. Wealth is hidden, it's income not spent.

Chapter 10 - Save Money

The only factor you can control generates one of the only things that matters. How wonderful.

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.

Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less what others think of you.

Being able to save money gives you the control over your time that is incredibly valuable. Having money saved gives you the flexibility to wait for good opportunities in both career and investments.

Chapter 11 - Reasonable > Rational

Aiming to be mostly reasonable works better than trying to be coldly rational.

When it comes something that often goes overlooked: Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.

Try to be reasonable rather than rational when making decisions about money.

If you invest because you like the company - you're likely to stick with that company longer.

Chapter 12 - Surprise!

History is the study of change, ironically used as a map of the future

History is the study of surprising events - and used as a guide by investors and economists as a guide to the future. Be cautious about using past history as a guide for these reasons:

You'll miss the outlier events that move the needle the most.

We have no idea what might happen next that can affect investments and economies.

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.

The make up of the S&P 500 is different in the 70's vs today, venture capital was not a thing in the 70's vs today, rules have changed, disclosures, auditing etc. The time between US recessions has changed dramatically. Benjamin Graham's book the Intelligent Investor has a number of analysis and techniques that have become outdated over time. His book was authored in the 70's but his techniques have been proven to be antiquated.

The further back you look, we are examining a world that no longer applies to today.

Whilst we should not ignore history we should acknowledge that the world evolves - looking at behaviours like the human relationship with greed and fear are good historical takeaways. Specific trends, trades sectors and relationships about markets evolve and change.

Chapter 13 - Room for Error

The most important part of every plan is planning on your plan not going according to plan.

The author uses the example where card counters maximize their probability of winning but are not always guaranteed to win. To stay in the hunt they must ensure that they have enough money to withstand any swings against them.

Benjamin Graham has a similar concept where he talks about margin of safety - or room for error. This concept gives you endurance to withstand hardship and stick around long enough if the odds may fall in your favor.

Bill Gates saved up a year's worth of payroll cash just in case.

The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. The odds are in oyur favor when playing Russian roulette. But the downside is not worth the potential upside. There is no margin of safety that can compensate for the risk.

Chapter 14 - You'll Change

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

We change.

We are poor at predicting our future selves and this has an impact on our ability to plan for our future financial goals. Hard to make long term decisions when what we want in the future will change.

Careers, investments and relationships benefit from compounding. Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily. We have to make choices based on striking a balance between earning income and living full lives and we should make changes to avoid future regret. We should accept the reality that we evolve as people and continue to move on as soon as possible.

Chapter 15 - Nothing's Free

Everything has a price, but not all prices appear on labels

When investing, the bigger the returns also include higher volatility. This is the price of chasing bigger returns. Many people try to outsmart volatility - some get away with it but most are punished.

Investging success is not immediately obvious and sometimes the loss incurred can feel like a "fine". Instead treat it like a "fee". Market returns are never free.

The volatility/uncertainty fee - the price of returns - is the cost of admission to get returns greater than low-fee parks like cash and bonds.

Chapter 16 - You & Me

Beware taking financial cues from people playing a different game than you are.

Investors have different goals and time horizons - prices can be expensive for one person can be cheap for another. For example a short term trader is looking to squeeze a few dollars in a single day so if an overpriced stock goes up - they simply exit when the target price is hit. A long term investor can be burnt by paying more for a stock than it's worth.

A key takeaway here is that 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 than you are.

Chapter 17 - The Seduction of Pessimism

Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.

Pessimism is easy, common and more pervasive than optimism.

One is that money is ubiquitous, so something bad happening tends to affect everyone and captures everyone's attention.

For example a recession impacts all of us - so we feel it.

Another is that pessimists often extrapolate present trends without accounting for how markets adapt.

Lester Brown in 2008 predicted we would not have enough oil due to China's demands. However technology has economically allowed us to obtain oil more efficiently. In 2008 to looks at the trends looked quite bad but everything adapts and evolves over time.

A third is that progress happens too slowly to notice, but setbacks happen to quickly to ignore

Examples given include the Wright brothers flying for the first time. It took four years for acknowledgement of their achievement. Flight development was underestimated for years.

Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you will feel great about.

Chapter 18 - When You'll Believe Anything

Appealing fictions, and why stories are more powerful than statistics.

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

The to believe whatever we want to believe when we are desperate is powerful. This is the path of least resistance we take.

The bigger the gap between what you want to be true and what you need to be true to have an acceptable outcome, the more you are protecting yourself from falling victim to an appealing financial fiction.

Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.

We live in a complicated world and to make sense of it sometimes we tell ourselves stories to fill in the gaps.

Chapter 19 - All Together Now

What we've learned about the psychology of your own money.

Personal finance is complex.

This chapter summarizes the book as follows:

Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong - things are not always as they seem and thew orld is complex. Respect the power of luck and risk.
Less ego, more wealth - saving money is the gap between your ego and your income, and wealth is what you don't see.
Manage your money in a way that helps you sleep at night - ask yourself if with your money can you sleep at night
If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon - Time is the most powerful force in investing. It makes little things grow big and mistakes fade away.
Become OK with a lot of things going wrong. You can be wrong half the time and still make fortune - you should be comfortable with a lot of stuff not working. That's how the world works. It's fine to have a large chunk of poor investments and a few outstanding ones.
Be nicer and less flashy - no one is impressed with your possessions as much as you are. If you want respect and admiration, be kind and humble.
Save. Just save. You don't need a specific reason to save - it's a good habit but life is full of suprises and it's always good to be ready.
Define the cost of success and be ready to pay it - nothing worthwhile is free, volatility and risk of loss think of them as fees.
Worship room for error - endurance is required to enjoy the benefits of compounding - allow for some room of error as it keeps you in the game and can pay itself many times over
Avoid the extreme ends of financial decisions - people change and if you made extreme financial decisions earlier on in life you may regret them as you evolve.
You should like risk because it pays off over time - but be careful of extreme risk because it prevents you from taking future risks that pay off over time
Define the game you're playing - make sure you're actions are not influenced by others
Respect the mess - find the answer that works for you

Chapter 20 - Confessions

The Psychology of my own money.

The author mentions living below his means and giving background on learning from his parents to live frugally and increase their savings rate to be able to be independent.

Mortgage is paid and whilst not the best financial decision - it's a psychologically sound decision and it works for the author. They also live a simple life and ensure that the goalposts don't move from their day to day living. Investments are kept in low cost index funds. Kids educations are funded by 529 plans.