The worst thing about Morgan Housel’s The Psychology of Money is the title.
Readers think it’s about getting rich.
But it’s actually about clear thinking.
Here are 16 lessons to fast-track your decision-making:
DECIDE WHAT’S ENOUGH
Before you get started.
What games are you playing & what are their goals?
If you skip this step, you’ll be condemned to play forever.
And it won’t be fun.
YOU PLAN, GOD LAUGHS
No plan survives contact with reality.
The more complicated it is, the more divergence there’ll be.
Simple & flexible wins.
Plan for things to not go according to plan.
LONG-TERM PLANNING IS FOOLISH
You have no idea what you’ll want at age 60.
Don’t live on the extreme ends of the decision spectrum.
Hug the middle.
I.E. Don’t allocate 100% or 0% of your $ on crypto.
Hedge your bets so you can pivot.
GOOD BEATS GREAT
Consistency beats bouts of genius over the long run.
This is all thanks to the compound effect.
SAVINGS WILL SAVE YOU
Earning doesn’t build wealth.
Saving does.
You can’t out-earn runaway spending.
Your spending rate can buy you freedom.
I.E. Spending 10k on a 90k income buys you 8 years of freedom.
THE SLEEP & PEACE DIVIDEND
Save for the unknown.
You don’t need a reason.
This pays off in a good night’s sleep & time freedom - which are priceless.
I have 28k in my savings account for this very reason
YOUR EXPERIENCE ≠ THE WORLD
Your life makes up 1 trillionth of world history.
Yet we act like it accounts for 80% of how the world works.
You can’t extrapolate your lived experience to fully understand the world.
PATTERNS VS PEOPLE
Focus on broad patterns vs exceptional individuals.
Angels & demons are tail ends on the distribution of human lives.
They tell you little about the world overall.
YOU’RE JUST LUCKY
A lot of success can be attributed to sheer luck.
Bill Gates just happened to attend 1 of the only high schools in the world with a computer.
HALF-WRONG IS ALRIGHT
You can be wrong 1/2 of the time & still make a fortune.
Make a portfolio of small bets like @dvassallo
If you’re diversified, the few winners will make up for the losers.
51/49
A slight edge is dangerous if played wrong.
It wins in the long run but can ruin you in the short run - if you bet too big.
Don’t risk to the point of ruin.
Read more here: https://ranbir.co/Cards/3+Reasons+Why+You+Still+Lose+with+the+Odds+in+Your+Favour
REASONABLE > RATIONAL
Life isn’t a spreadsheet.
In many cases, you can earn more in the market vs paying off your mortgage early.
But the latter pays you peace of mind.
So it may be the best choice, despite the math.
This is also why AI has its limits.
THE PAST IS THE PAST
History is the study of past change.
Yet we use it as a signal for the future.
Investors use historical market returns as a future benchmark.
Yet tail events skew everything & can’t be predicted:
- COVID
- 9/11
- WW2
WE’RE ALL PLAYING DIFFERENT GAMES
Don’t take cues from strangers.
I.E An analyst says the price of a stock makes it a buy.
That advice is meant to apply to long-term investors, swing traders & day traders alike.
Yet they’re all playing differently.
THE BAD NEWS BIAS
You’re primed to pay attention to doomsayers over optimists.
I’ve listened to people say Toronto has been in a housing bubble since 2011.
Since then, the average price has risen 155%.
Our minds are skewed towards a loss aversion bias.
CUT YOURSELF SOME SLACK
Make decisions that allow you to afford to be wrong.
Because you will be, often.
But that’s just part of being a clear-thinking human :)