8.5/10
Investing

The Psychology of Money

by

Morgan Housel

👉🏼 Buy from Amazon

🔥 The Book in 3 Sentences

  1. Don't be greedy
  2. Save, save and save for saving’s sake
  3. Don't listen to anyone about stock market picks or investment, and trust your own game.

🧘🏽 The Top 3 Quotes

  1. You can be wrong half the time and still make a fortune.
  2. Money's greatest intrinsic value–and this can't be overstated–is its ability to give you control over your time.
  3. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.

Summary Notes

1. No One's Crazy

The economists wrote: “Our findings suggest that individual investors’ willingness to bear risk depends on personal history”.

Dogs were domesticated 10,000 years ago and still retain some behaviors of their wild ancestors. Yet here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated.

For a topic that is so influenced by emotion versus fact, this is a problem. And it helps explain why we don’t always do what we’re supposed to with money.

But no one is crazy––we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.


2. Luck & Risk


Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.

Risk and luck are doppelgängers.

Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. Or, just be careful when assuming that 100% of outcomes can be attributed to effort and decisions.

Therefore, focus less on specific individuals and case studies and more on broad patterns.

Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”


3. Never Enough


a. The hardest financial skill is getting the goalpost to stop moving. It gets dangerous when the taste of having more––more money, more power, more prestige–––increases ambition faster than satisfaction. Modern capitalism is a pro at two things: generating wealth and generating envy. 

b. Social comparison is the problem here. The point is that ceiling of social comparison is so high that virtually no one will ever hit it.  “The only way to win in a Las Vegas casino is to exit as soon as you enter.”

c. “Enough” is not too little. Enough is realizing that the opposite––an insatiable appetite for more––will push you to the point of regret.

d.There are many things never worth risking, no matter the potential gain. Don’t get too attached to anything––your reputation, your accomplishments or any of it.

4. Confounding - Compounding

$81.5 billion of Warren Buffett’s, $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities. 

The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results. 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. It can be so logic-defying that you underestimate what’s possible, where growth comes from and what it can lead to. And so it is with money.

Warren Buffett’s skill is investing, but his secret is time. That’s how compounding works.

But good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.


5. Getting Wealthy vs Staying Wealthy

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

Getting money is one thing. Keeping it is another.

Getting money requires taking risks, being optimistic, and putting yourself out there.

But keeping money requires the opposite of taking risks. It requires humility, and fear that what you’ve made can be taken away from you just as fast.

Compounding only works if you can give an asset years and years to grow. 

Warren Buffett didn’t panic and sell during the 14 recessions he’s lived through. He didn’t sully his business reputation. He didn’t attach himself to one strategy, one world view, or one passing trend. He didn’t rely on others’ money. He didn’t burn himself out and quit or retire. He survived.

Nassim Taleb put it this way: “Having an “edge” and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.”


Apply this survival mindset to the real world:

a. More than I want big returns, I want to be financially unbreakable.

b. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

c. A barbelled personality–optimistic about the future, but paranoid about what will prevent you from getting to the future–is vital.


6. Tails, You Win.

If you want safer, predictable, and more stable returns, you invest in large public companies.

Remember, tails drive everything.

Napoleon’s definition of a military genius was, “The man who can do the average when all those around him are going crazy.”

[...] You could invest that $1 into the U.S. stock market every month, rain or shine. It doesn’t matter if economists are screaming about a looming recession or new bear market. You just keep investing.

A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.

Something I’ve learned from both investors and entrepreneurs is that no one makes good decisions all the time. The most impressive people are packed full of horrendous ideas that are often acted upon.

“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.


7. Freedom


Controlling your time is the highest dividend money pays.

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”

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

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.

Six month’s emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job.

[...] But doing something you love on a schedule you can’t control can feel the same as doing something you hate. There’s a name for this feeling. Psychologists call it reactance.


8. Man in the Car Paradox

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

If respect and admiration are you goals, be careful how you seek it. Humility, kindness, and empathy will bring you more  respect than horsepower ever will.

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.

Money has many ironies. Here’s an important one: Wealth is what you don’t see.

Modern capitalism makes helping people fake it until they make it cherished industry.

Wealth is the nice care not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.

We should be careful to define the difference between wealthy and rich. Rich is a current income.

But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.

10. Save Money


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

Personal savings and frugality–finance’s conservation and efficiency–are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future are they are today.

Most importantly, the value of wealth is relative to what you need.

Everyone needs the basics. Once they’re covered there’s another level of comfortable basics, and past that there’s basics that are both comfortable, entertaining, and enlightening.

Savings can be created by spending less.

You can spend less if you desire less.

And you will desire less if you care less about what others think of you.

Some people s save money for a downpayment on a house, or a new care, or a retirement.

That’s great, of course.

But saving does not require a goal of purchasing something specific.

You can save just for saving’s sake. And indeed you should. Everyone should.

The flexibility and control over your time is an unseen return on wealth.

If you have flexibility you can wait for good opportunities, both in your career and for your investments.

[...] the ability to do those things when most others can’t is one of the few things that will set you apart in a world where intelligence is no longer a sustainable advantage.

11. Reasonable > Rational


You’re not a spreadsheet. You’re a person. A screwed up, emotional person. 

It took me a while to figure this out, but once it clicked I realized it’s one of the most important parts of finance.

Do not aim to be coldly rational when making financial decisions. Aime to just be pretty reasonable. But Wagner-Jauregg is one of the only doctors in history who not only recognized fever’s role in fighting infection but also prescribed it as treatment.

12. Surprise!


History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future. 

A trap many investors fall into is what I call “historians as prophets” fallacy: an overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.

[...] experience leads to overconfidence more than forecasting ability.

Two dangerous things happen when you rely too heavily on investment history as a guide to what’s going to happen next.

This is not a failure of analysis. It’s a failure of imagination. Realizing the future might not look anything like the past is a special kind of skill that is not generally looked highly upon by the financial forecasting community.

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.

13. Room for Error


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

You have to give yourself room for error. You have to plan on your plan not going according to plan.

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.Graham’s margin of safety is a simple suggestion that we don’t need to view the world in front of us as black or white, predictable or a crapshoot.

A one-third buffer is enough to allow me to sleep well at night. And if the future does resemble the past, I’ll be pleasantly surprised. “The best way to achieve felicity is to aim low,” says Charlie Munger. Wonderful.

14. You'll change

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

Long-term financial planning is essential. But things change–both the world around you and your own goals and desires.

The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future.

Gilbert’s research shows people from age 18 to 68 underestimate how much they will change in the future.

Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily. 

But there are two things to keep in mind when making what you think are long-term decisions.

We should avoid the extreme ends of financial planning.

The fuel of the End of History Illusion is that people adapt to most circumstances, so the benefits of an extreme plan–the simplicity of having hardly anything, or the thrill of having almost everything–wear off.

Compounding works best when you can give a plan years or decades to grow.

We should also come to accept the reality of changing our minds.

15. Nothing's Free

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

The S&P 500 increased 119-fold in the 50 years ending 2018. All you had to do was sit back and let your money compound. But, of course, successful investing looks easy when you’re not the one doing it.

“Hold stocks for the long run,” you’ll hear. It’s good advice.

The price of investing success is not immediately obvious. You’re supposed to make decisions that preempt and avoid fines.

It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.

Few investors have the disposition to say, “I’m actually fine if I lose 20% of my money.” This is doubly true for new investors who have never experienced a 20% decline.

Find the price, then pay it.


16. You & Me

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

[...] people are greedy, and greed is an indelible feature of human nature.

People make financial decisions they regret, and they often do so with scarce information and without logic.

An iron rule of finance is that money chases returns to the greatest extent that it can.

A takeaway here is that a 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.

17. The Seduction of Pessimism


Optimism is the best bet for most people because the world tends to get better for most people most of the time.

But pessimism holds a special in our hearts. Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.

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.

If a smart person tells me they have a stock pick that’s going to rise 10-fold in the next year, I will immediately write them off as full of nonsense. 

If someone who’s full of nonsense tells me that stock I own is about to collapse because it’s an accounting fraud, I will clear my calendar and listen to their every word.


John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of a person a sage.”


There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.

Assuming that something ugly will stay ugly is an easy forecast to make. And it’s persuasive because it doesn’t require imagining the world changing. But problems are correct and people adapt. Threats incentivize solutions in equal magnitude. That’s a common plot of economic history that is too easily forgotten by pessimist who forecast in straight lines.

Growth is driving by compounding, which always take time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.

In investing you must identify the price of success–volatility and loss amid the long the backdrop of growth–and be willing to pay it.

Expecting things to be bad is the best way to be pleasantly surprised when they’re not. Which, ironically, is something to be optimistic about.

18. When You'll Believe Anything


But stories are, by far, the most powerful force in the economy.

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


a. 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.

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


Part of the reason forecasting the stock market and the economy is so hard is because you are the only person in the world who thinks the world operates the way you do. When you make decisions for reasons that I can’t even comprehend, I might follow you blindly into a decision that’s right f or you and disastrous to me. This is how bubbles form.

I have not met an investor who genuinely thinks market forecasts as a whole are accurate or useful. But there’s still tremendous demand for forecasts, in both the media and from financial advisors. 

Psychologist Philip Tetlock once wrote: “We need to believe we live in a predictable, controllable world, so we can turn to authoritative-sounding people who promise to satisfy that need.”

The illusion of control is more persuasive than the really of uncertainty.

[...] But astrophysics is a field of precision. It isn’t impacted by the vagaries of human behavior and emotions, like finance is.






You might also like

💬 Thoughts

  1. Don't be greedy
  2. Save, save and save for saving’s sake
  3. Don't listen to anyone about stock market picks or investment, and trust your own game.

🕵🏽 How I discover it

  1. You can be wrong half the time and still make a fortune.
  2. Money's greatest intrinsic value–and this can't be overstated–is its ability to give you control over your time.
  3. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.

Summary Notes

1. No One's Crazy

The economists wrote: “Our findings suggest that individual investors’ willingness to bear risk depends on personal history”.

Dogs were domesticated 10,000 years ago and still retain some behaviors of their wild ancestors. Yet here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated.

For a topic that is so influenced by emotion versus fact, this is a problem. And it helps explain why we don’t always do what we’re supposed to with money.

But no one is crazy––we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.


2. Luck & Risk


Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.

Risk and luck are doppelgängers.

Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. Or, just be careful when assuming that 100% of outcomes can be attributed to effort and decisions.

Therefore, focus less on specific individuals and case studies and more on broad patterns.

Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”


3. Never Enough


a. The hardest financial skill is getting the goalpost to stop moving. It gets dangerous when the taste of having more––more money, more power, more prestige–––increases ambition faster than satisfaction. Modern capitalism is a pro at two things: generating wealth and generating envy. 

b. Social comparison is the problem here. The point is that ceiling of social comparison is so high that virtually no one will ever hit it.  “The only way to win in a Las Vegas casino is to exit as soon as you enter.”

c. “Enough” is not too little. Enough is realizing that the opposite––an insatiable appetite for more––will push you to the point of regret.

d.There are many things never worth risking, no matter the potential gain. Don’t get too attached to anything––your reputation, your accomplishments or any of it.

4. Confounding - Compounding

$81.5 billion of Warren Buffett’s, $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities. 

The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results. 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. It can be so logic-defying that you underestimate what’s possible, where growth comes from and what it can lead to. And so it is with money.

Warren Buffett’s skill is investing, but his secret is time. That’s how compounding works.

But good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.


5. Getting Wealthy vs Staying Wealthy

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

Getting money is one thing. Keeping it is another.

Getting money requires taking risks, being optimistic, and putting yourself out there.

But keeping money requires the opposite of taking risks. It requires humility, and fear that what you’ve made can be taken away from you just as fast.

Compounding only works if you can give an asset years and years to grow. 

Warren Buffett didn’t panic and sell during the 14 recessions he’s lived through. He didn’t sully his business reputation. He didn’t attach himself to one strategy, one world view, or one passing trend. He didn’t rely on others’ money. He didn’t burn himself out and quit or retire. He survived.

Nassim Taleb put it this way: “Having an “edge” and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.”


Apply this survival mindset to the real world:

a. More than I want big returns, I want to be financially unbreakable.

b. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

c. A barbelled personality–optimistic about the future, but paranoid about what will prevent you from getting to the future–is vital.


6. Tails, You Win.

If you want safer, predictable, and more stable returns, you invest in large public companies.

Remember, tails drive everything.

Napoleon’s definition of a military genius was, “The man who can do the average when all those around him are going crazy.”

[...] You could invest that $1 into the U.S. stock market every month, rain or shine. It doesn’t matter if economists are screaming about a looming recession or new bear market. You just keep investing.

A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.

Something I’ve learned from both investors and entrepreneurs is that no one makes good decisions all the time. The most impressive people are packed full of horrendous ideas that are often acted upon.

“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.


7. Freedom


Controlling your time is the highest dividend money pays.

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”

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

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.

Six month’s emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job.

[...] But doing something you love on a schedule you can’t control can feel the same as doing something you hate. There’s a name for this feeling. Psychologists call it reactance.


8. Man in the Car Paradox

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

If respect and admiration are you goals, be careful how you seek it. Humility, kindness, and empathy will bring you more  respect than horsepower ever will.

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.

Money has many ironies. Here’s an important one: Wealth is what you don’t see.

Modern capitalism makes helping people fake it until they make it cherished industry.

Wealth is the nice care not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.

We should be careful to define the difference between wealthy and rich. Rich is a current income.

But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.

10. Save Money


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

Personal savings and frugality–finance’s conservation and efficiency–are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future are they are today.

Most importantly, the value of wealth is relative to what you need.

Everyone needs the basics. Once they’re covered there’s another level of comfortable basics, and past that there’s basics that are both comfortable, entertaining, and enlightening.

Savings can be created by spending less.

You can spend less if you desire less.

And you will desire less if you care less about what others think of you.

Some people s save money for a downpayment on a house, or a new care, or a retirement.

That’s great, of course.

But saving does not require a goal of purchasing something specific.

You can save just for saving’s sake. And indeed you should. Everyone should.

The flexibility and control over your time is an unseen return on wealth.

If you have flexibility you can wait for good opportunities, both in your career and for your investments.

[...] the ability to do those things when most others can’t is one of the few things that will set you apart in a world where intelligence is no longer a sustainable advantage.

11. Reasonable > Rational


You’re not a spreadsheet. You’re a person. A screwed up, emotional person. 

It took me a while to figure this out, but once it clicked I realized it’s one of the most important parts of finance.

Do not aim to be coldly rational when making financial decisions. Aime to just be pretty reasonable. But Wagner-Jauregg is one of the only doctors in history who not only recognized fever’s role in fighting infection but also prescribed it as treatment.

12. Surprise!


History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future. 

A trap many investors fall into is what I call “historians as prophets” fallacy: an overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.

[...] experience leads to overconfidence more than forecasting ability.

Two dangerous things happen when you rely too heavily on investment history as a guide to what’s going to happen next.

This is not a failure of analysis. It’s a failure of imagination. Realizing the future might not look anything like the past is a special kind of skill that is not generally looked highly upon by the financial forecasting community.

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.

13. Room for Error


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

You have to give yourself room for error. You have to plan on your plan not going according to plan.

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.Graham’s margin of safety is a simple suggestion that we don’t need to view the world in front of us as black or white, predictable or a crapshoot.

A one-third buffer is enough to allow me to sleep well at night. And if the future does resemble the past, I’ll be pleasantly surprised. “The best way to achieve felicity is to aim low,” says Charlie Munger. Wonderful.

14. You'll change

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

Long-term financial planning is essential. But things change–both the world around you and your own goals and desires.

The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future.

Gilbert’s research shows people from age 18 to 68 underestimate how much they will change in the future.

Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily. 

But there are two things to keep in mind when making what you think are long-term decisions.

We should avoid the extreme ends of financial planning.

The fuel of the End of History Illusion is that people adapt to most circumstances, so the benefits of an extreme plan–the simplicity of having hardly anything, or the thrill of having almost everything–wear off.

Compounding works best when you can give a plan years or decades to grow.

We should also come to accept the reality of changing our minds.

15. Nothing's Free

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

The S&P 500 increased 119-fold in the 50 years ending 2018. All you had to do was sit back and let your money compound. But, of course, successful investing looks easy when you’re not the one doing it.

“Hold stocks for the long run,” you’ll hear. It’s good advice.

The price of investing success is not immediately obvious. You’re supposed to make decisions that preempt and avoid fines.

It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.

Few investors have the disposition to say, “I’m actually fine if I lose 20% of my money.” This is doubly true for new investors who have never experienced a 20% decline.

Find the price, then pay it.


16. You & Me

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

[...] people are greedy, and greed is an indelible feature of human nature.

People make financial decisions they regret, and they often do so with scarce information and without logic.

An iron rule of finance is that money chases returns to the greatest extent that it can.

A takeaway here is that a 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.

17. The Seduction of Pessimism


Optimism is the best bet for most people because the world tends to get better for most people most of the time.

But pessimism holds a special in our hearts. Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.

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.

If a smart person tells me they have a stock pick that’s going to rise 10-fold in the next year, I will immediately write them off as full of nonsense. 

If someone who’s full of nonsense tells me that stock I own is about to collapse because it’s an accounting fraud, I will clear my calendar and listen to their every word.


John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of a person a sage.”


There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.

Assuming that something ugly will stay ugly is an easy forecast to make. And it’s persuasive because it doesn’t require imagining the world changing. But problems are correct and people adapt. Threats incentivize solutions in equal magnitude. That’s a common plot of economic history that is too easily forgotten by pessimist who forecast in straight lines.

Growth is driving by compounding, which always take time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.

In investing you must identify the price of success–volatility and loss amid the long the backdrop of growth–and be willing to pay it.

Expecting things to be bad is the best way to be pleasantly surprised when they’re not. Which, ironically, is something to be optimistic about.

18. When You'll Believe Anything


But stories are, by far, the most powerful force in the economy.

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


a. 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.

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


Part of the reason forecasting the stock market and the economy is so hard is because you are the only person in the world who thinks the world operates the way you do. When you make decisions for reasons that I can’t even comprehend, I might follow you blindly into a decision that’s right f or you and disastrous to me. This is how bubbles form.

I have not met an investor who genuinely thinks market forecasts as a whole are accurate or useful. But there’s still tremendous demand for forecasts, in both the media and from financial advisors. 

Psychologist Philip Tetlock once wrote: “We need to believe we live in a predictable, controllable world, so we can turn to authoritative-sounding people who promise to satisfy that need.”

The illusion of control is more persuasive than the really of uncertainty.

[...] But astrophysics is a field of precision. It isn’t impacted by the vagaries of human behavior and emotions, like finance is.






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