[Article Review] The Psychology of Money by Morgan Housel
This article, The Psychology of Money, was recommended to me by Ino Murko. It’s a great read on personal investment.
The author described 20 flaws, biases, and causes of bad behavior when people deal with money. Below are my favorite excerpts.
“In no other field does someone with no education, no relevant experience, no resources, and no connections vastly outperform someone with the best education, the most relevant experiences, the best resources and the best connections […] Managing money isn’t necessarily about what you know; it’s how you behave. […] The finance industry talks too much about what to do, and not enough about what happens in your head when you try to do it.”
“An overreliance on past data as a signal to future conditions in a field where innovation and change is the lifeblood of progress. The cornerstone of economics is that things change over time, because the invisible hand hates anything staying too good or too bad indefinitely.”
“The problem with viewing crowds as evidence of accuracy when dealing with money is that opportunity is almost always inversely correlated with popularity.”
“The first rule of compounding is to never interrupt it unnecessarily.”
” ‘Don’t do anything’ are the most powerful words in finance. But they are both hard for individuals to accept and hard for professionals to charge a fee for.”
“What you don’t realize is that the traders moving the marginal price are playing a totally different game than you are. And if you start taking cues from people playing a different game than you are, you are bound to be fooled and eventually become lost, since different games have different rules and different goals.”
“Because finance is entertaining in a way other things – orthodontics, gardening, marine biology – are not. Money has competition, rules, upsets, wins, losses, heroes, villains, teams, and fans that makes it tantalizingly close to a sporting event. But […] you’re both the fan and the player, with outcomes affecting you both emotionally and directly. Which is dangerous.”
“Extrapolating the recent past into the near future, and then overestimating the extent to which whatever you anticipate will happen in the near future will impact your future. Most of the time, something big happening doesn’t increase the odds of it happening again. It’s the opposite, as mean reversion is a merciless law of finance.”
“If you see someone driving a $200,000 car, the only data point you have about their wealth is that they have $200,000 less than they did before they bought the car. […] Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see.”
If you find these excerpts resonate with you, check out the original article: The Psychology of Money by Morgan Housel.