Morgan Housel – Psychology of investing, money & writing

https://youtu.be/LLHg72BskQg

Episode Notes & Transcript

“Morgan Housel,”Books are like seed stage startups, 99% of them don’t work, so going into writing a book an author has to know that the odds are stacked against them.”

“When I look back at my teenage years, never in a million years would I think I’d be a professional writer” 

“If you write three articles per day for 5 years, you’ll improve”

“What works is so simple, that people won’t take it seriously because they think it has to be more complex” 

“I want to prove my intelligence through simplicity”

How People Think  

1. Everyone belongs to a tribe and underestimates how influential that tribe is on their thinking.

• But tribes have their own rules, beliefs, and ideas. Some of them you might disagree with; some are even abjectly terrible. Yet they remain supported because no one wants to risk being shunned by a tribe that’s become part of their identity. So people either willingly nod along with bad ideas, or become blinded by tribal loyalty at how bad the ideas are to begin with.

2. What people present to the world is a tiny fraction of what’s going on inside their head.

• Most things are harder than they look and not as fun as they seem because the information we’re exposed to tends to be a highlight reel of what people want you to know about themselves to increase their own chances of success. It’s easiest to convince people that you’re special if they don’t know you well enough to see all the ways you’re not.
• When you are keenly aware of your own struggles but blind to others’, it’s easy to assume you’re missing some skill or secret that others have. Sometimes that’s true. More often you’re just blind to how much everyone else is making it up as they go, one challenge at a time.

3. Prediction is about probability and putting the odds of success in your favor. But observers mostly judge you in binary terms, right or wrong.

• The core here is that people think they want an accurate view of the future, but what they really crave is certainty.
• It’s normal to want to rid yourself of the painful reality of not knowing what’s going to happen next. Someone who tells you there’s a 60% chance of a recession happening doesn’t do much to erase that pain. They might be adding to it. But someone who says, “There is going to be a recession this year,” offers something to grab onto with both hands that feels like taking control of your future.

4. We are extrapolating machines in a world where nothing too good or too bad lasts indefinitely.

• When there’s a crisis, people get motivated. When they get motivated they frantically solve problems. When they solve problems crises tend to end.
• Good times plant the seeds of their destruction through complacency and leverage, and bad times plant the seeds of their turnaround through opportunity and panic-driven problem-solving.
• When alcohol from fermentation reaches a certain point it kills the yeast that made it in the first place. Most powerful trends end the same way. And that kind of force isn’t intuitive, requiring you to consider not just how a trend impacts people, but how that impact will change people’s behavior in a way that could end the trend.

5. There are limits to our sanity. Optimism and pessimism always overshoot because the only way to know the boundaries of either is to go a little bit past them.

• Jerry Seinfeld had the most popular show on TV. Then he quit. He later said he killed his show while it was thriving because the only way to identify the top is to experience the decline, which he had no interest in. Maybe the show could keep rising, maybe it couldn’t. He was fine not knowing the answer.
• If you want to know why there’s a long history of the world blowing past the boundaries of sanity, bouncing from boom to bust, absurdity to absurdity, it’s because so few people have Jerry’s mentality. Opportunity is scarce and people don’t want to leave any on the table. So they insist on knowing where the top is.
• Most things in the world are a mix of facts and emotions. The important thing is that emotions aren’t something you can predict with a formula.
• The only way to find the limits of people’s moods – the only way to find the top – is to keep pushing until we’ve gone too far, when we can look back and say, “Ah, I guess that was the limit.”

6. Ignoring that people who think about the world in unique ways you like also think about the world in unique ways you won’t like.

• He is not human.Some variation of that phrase can be used on most of your role models – people who have extreme, outlying success. You like them because they do things other people would never consider, or can’t even comprehend.
• I’ve always thought that people who are abnormally good at one thing tend to be abnormally bad at something else. Or maybe not bad, but something you wouldn’t necessarily want in your own life. They’re natural maniacs, extreme in every way, good and bad.
• Andrew Wilkinson says: “Most successful people are just a walking anxiety disorder harnessed for productivity.”
•  Naval once wrote: One day, I realized with all these people I was jealous of, I couldn’t just choose little aspects of their life. I couldn’t say I want his body, I want her money, I want his personality. You have to be that person. Do you want to actually be that person with all of their reactions, their desires, their family, their happiness level, their outlook on life, their self-image? If you’re not willing to do a wholesale, 24/7, 100 percent swap with who that person is, then there is no point in being jealous.

7. We are pushed toward maximizing efficiency in a way that leaves no room for error, despite room for error being the most important factor of long-term success.

• The world is competitive. If you don’t exploit an opportunity your competition will. So opportunity is usually exploited to its fullest extent as soon as possible.
• That’s great – it pushes the world forward. But it has a nasty side effect: When all opportunity is exploited there is no room for error, and when there’s no room for error any system exposed to volatility and accident will eventually break.
• So many people strive for efficient lives, where no hour is wasted. But when no hour is wasted you have no time to wander, explore something new, or let your thoughts run free – which can be some of the most productive forms of thought. Psychologist Amos Tversky once said “the secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.” A successful person purposely leaving gaps of free time on their schedule can feel inefficient. And it is, so not many people do it.
• The paradox that room for error is essential to survival in the long run, but maximizing efficiency in a way that eliminates room for error can be essential to surviving the short run, is a strange one.

8. The best story wins.

• Not the best idea. Not the right answer. Just whoever tells a story that catches people’s attention and gets them to nod their heads. Sherlock Holmes put it: “What you do in this world is a matter of no consequence. The question is what can you make people believe you have done.”
• Great ideas explained poorly can go nowhere while old or wrong ideas told compellingly can ignite a revolution. Morgan Freeman can narrate a grocery list and bring people to tears, while an inarticulate scientist might cure disease and go unnoticed.
• The largest crowds are drawn by the storytellers. It is around them that the people throng most densely and stay longest… their words come from further off and hang longer in the air than those of ordinary people.
• This drives you crazy if you assume the world is swayed by facts and objectivity – if you assume the best idea wins. But it’s how people think. And it’s actually optimistic, because when you realize you can change the world by explaining an old thing in a new way vs. creating something new, you start to see so much potential.

9. We are swayed by complexity when simplicity is the real mark of intelligence and understanding.

• Simplicity is the hallmark of truth— we should know better, but complexity continues to have a morbid attraction. When you give for an academic audience a lecture that is crystal clear from alpha to omega, your audience feels cheated and leaves the lecture hall commenting to each other: “That was rather trivial, wasn’t it? The sore truth is that complexity sells better.
• One is that length is often the only thing signaling effort and thoughtfulness.
• A second is that things you don’t understand create a mystique around people who do. 
• A third is that complexity gives a comforting impression of control, while simplicity is hard to distinguish from cluelessness. 

10. Your willingness to believe a prediction is influenced by how much you want or need that prediction to be true.

• There are so many things in life that we think are true because we desperately want them to be true. People do this with their relationships, careers, investments, political views – anything forward-looking is subject to being swayed by your desire to have a pleasant life.
• Everyone is a dreamer because it’s hard to go about your day when you genuinely believe the future will be difficult. An appealing fiction – believing in the outcome you want even if it’s unlikely to come true – is often the only comfort in an uncertain world.
• The higher the stakes, the truer this becomes.
• If you desperately need a solution and a good one isn’t known or readily available to you, the path of least resistance is willingness to believe anything. Not just try anything, but believe it.

11. It’s hard to empathize with other people’s beliefs if they’ve experienced parts of the world you have not.

• If I ask you in a questionnaire whether you are afraid of snakes, you might say no. If I throw a live snake in your lap and then ask if you’re afraid of snakes, you’ll probably say yes—if you ever talk to me again.
• The gap between how you feel as an outsider vs. how you feel when you’re experiencing something firsthand can be a mile wide.
• My guess is that more than half of all disagreements – personal, domestic, international, financial – would disappear if you could see the world through the lens of your opponent, and had experienced what they have in life.
•  few questions everyone should ask themselves:
• Which of my current views would I disagree with if I were born in a different country or generation?
• What haven’t I experienced firsthand that leaves me naive to how something works?
• What is a problem that I think only applies to other countries/industries/careers that will eventually impact me?
• But they’re impossible to answer completely. So everyone’s a little bit blind to how the world works, and when they think they’re disagreeing with someone else they’re actually just uncovering an experience they haven’t had.

12. An innocent denial of your own flaws, caused by the ability to justify your mistakes in your own head in a way you can’t do for others.

•  “It is easier to recognize other people’s mistakes than our own.”
• I would add my own theory: It’s easier to blame other people’s mistakes on stupidity and greed than our own.
• That’s because when you make a mistake, I judge it solely based on what I see. It’s quick and easy.
• But when I make a mistake there’s a long and persuasive monologue in my head that justifies bad decisions and adds important context other people don’t see.
• “All behavior makes sense with enough information.”
• You see someone doing something crazy and think, “Why in the world would you do that?” Then you sit down with them, hear about their life, and after a while you realize, “Ah, I kind of get it now.”
• Everyone is a product of their own life experiences, few of which are visible or known to other people.
• “What have you experienced that I haven’t that would make you believe what you do? And would I think about the world like you do if I experienced what you have?”
• It’s the question that contains the most answers of why people don’t agree with each other.

13. An underappreciation for how small things compound into extraordinary things.

• The most astounding force in the universe is obvious. It’s evolution. The thing that guided single-cell organisms into a human who can read this article on an iPhone with 500 gigs of storage. The thing that’s responsible for 20/20 vision and flying birds and immune systems. Nothing else in science can blow your mind more than what evolution has accomplished.
• Biologist Leslie Orgel used to say, “evolution is cleverer than you are” because whenever a critic says, “evolution could never do that” they usually just lacked imagination.
• Howard Marks once talked about an investor whose annual results were never ranked in the top quartile, but over a 14-year period he was in the top 4% of all investors. If he keeps those mediocre returns up for another 10 years he may be in the top 1% of his peers – one of the greatest of his generation despite being unmentionable in any given year.
• So much focus in investing is on what people can do right now, this year, maybe next year. “What are the best returns I can earn?” seems like such an intuitive question to ask. But like evolution, that’s not where the magic happens.
• If you understand the math behind compounding you realize the most important question is not “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?”

14. The gap between knowing what to do and actually getting people to do it can be enormous.

• I once asked a doctor: What’s the hardest part of your job?
• It wasn’t the stress or responsibility. It was so basic. “Getting my patients to do what I ask of them,” she said.
• So many things in life work like that. Investing, relationships, health, careers. In each, what we should do isn’t that hard – it’s actually doing it that requires moving mountains.
• Issac Asimov said, “Science gathers knowledge faster than society gathers wisdom,” which sums up a lot of things quite well.

15. We’re bad at imagining how change will feel because there’s no context in dreams.

• I don’t think I’ve met, or know of, anyone with outsized success who gained as much happiness as an outsider might expect. That doesn’t mean success can’t bring pride or contentment or independence. But it’s rarely what you thought it would be before achieving it.
• Jim Carrey once said, “I think everybody should get rich and famous and do everything they ever dreamed of so they can see that it’s not the answer.”
• I think part is the same reason predicting loss is difficult: It’s hard to imagine the full context.
• If you think of your future self living in a new mansion, you imagine basking in splendor and everything feeling great. What’s easy to forget is that people in mansions can get the flu, have psoriasis, become embroiled in lawsuits, bicker with their spouses, are wracked with insecurity and annoyed with politicians – which in any given moment can supersede any joy that comes from material success. Future fortunes are imagined in a vacuum, but reality is always lived with the good and bad taken together, competing for attention.

16. We are blind to how fragile the world is due to a poor understanding of rare events.

• Littlewood’s law of miracles states that in the course of any normal person’s life, miracles happen at the rate of roughly one per month. The proof of the law is simple. During the time that we are awake and actively engaged in living our lives, roughly for eight hours each day, we see and hear things happening at a rate of one per second. So the total number of events that happen to us is about 30,000 per day, or about a million per month. With few exceptions, these events are not miracles because they are insignificant. The chance of a miracle is about one per million events. Therefore we should expect about one miracle to happen, on average, every month.
• The idea that incredible things happen because of boring statistics is important, because it’s true for terrible things too.
• A 100-year event doesn’t mean it happens every 100 years. It means there’s about a 1% chance of it occurring in any given year. That seems low. But when there are hundreds of different independent 100-year events, what are the odds that any one of them will occur in a given year? Pretty good, in fact.

17. The inability to accept hassle, nonsense, and inefficiency frustrates people who can’t accept how the world works.

• Steven Pressfield wrote for 30 years before publishing The Legend of Bagger Vance. His career leading up to then was bleak, at one point living in a halfway house because it had cheap rent. He once spoke about the people he met living there: The people in this halfway house, we used to hang out in the kitchen and talk all night long, were among the smartest people that I ever met and the funniest and the most interesting. And what I concluded from hanging out with them and from others in a similar situation was that they weren’t crazy at all. They were actually the smart people who had seen through the bullshit. And because of that, they couldn’t function in the world. They couldn’t hold a job because they just couldn’t take the bullshit, and that was how they wound up in institutions. The greater society thought, “Well these people are absolute rejects. They can’t fit in.” But in fact they were actually the people that really saw through everything.
• This may not have been Pressfield’s point, but it reminds of something I’ve long believed, and an insight into how so many people think.
• If you recognize that BS is ubiquitous, then the question is not “How can I avoid all of it?” but, “What is the optimal amount to put up with so I can still function in a messy and imperfect world?”
• If your tolerance is zero – if you are allergic to differences in opinion, personal incentives, emotions, inefficiencies, miscommunication and such – your odds of succeeding in anything that requires other people rounds to zero. You can’t function in the world, as Pressfield says.
• I’ll tell you: So many people don’t have enough tolerance for BS. Maybe they’re not at the level Pressfield describes. But there’s a gap between their expectations and the reality of how the world works.
• Franklin Roosevelt – the most powerful man in the world whose paralysis meant the aides often had to carry him to the bathroom – once said, “If you can’t use your legs and they bring you milk when you want orange juice, you learn to say ‘that’s all right,’ and drink it.”

Once In A Lifetime 

“There are about eight billion people on this planet. So if an event has a 1-in-a-million chance of occurring every day, it should happen to 8,000 people a day, or 2.9 million times a year, and maybe a quarter of a billion times during your lifetime. Even a 1-in-a-billion event will become the fate of hundreds of thousands of people during your lifetime. And given the media’s desire to promote shocking headlines, you will hear their names and see their faces.

Physicist Freeman Dyson once explained that what’s often attributed to the supernatural, or magic, or miracles, is actually just basic math. He explained:

In the course of any normal person’s life, miracles happen at the rate of roughly one per month.

The proof of the law is simple. During the time that we are awake and actively engaged in living our lives, roughly for eight hours each day, we see and hear things happening at a rate of one per second. So the total number of events that happen to us is about 30,000 per day, or about a million per month.

With few exceptions, these events are not miracles because they are insignificant. The chance of a miracle is about one per million events.

Therefore we should expect about one miracle to happen, on average, every month.”

Ideas that changed my life 

https://www.collaborativefund.com/blog/ideas-that-changed-my-life/

• Everyone belongs to a tribe and underestimates how influential that tribe is on their thinking. 
• Everything’s been done before. The scenes change but the behaviors and outcomes don’t. Historian Niall Ferguson’s plug for his profession is that “The dead outnumber the living 14 to 1, and we ignore the accumulated experience of such a huge majority of mankind at our peril.” The biggest lesson from the 100 billion people who are no longer alive is that they tried everything we’re trying today. The details were different, but they tried to outwit entrenched competition. They swung from optimism to pessimism at the worst times. They battled unsuccessfully against reversion to the mean. They learned that popular things seem safe because so many people are involved, but they’re most dangerous because they’re most competitive. Same stuff that guides today, and will guide tomorrow. History is abused when specific events are used as a guide to the future. It’s way more useful as a benchmark for how people react to risk and incentives, which is pretty stable over time.
• Multi-discipline learning: There’s as much to learn about your field from other fields than there is within your field. 
• Self-interest can lead people to believe and justify nearly anything. I have seen investors justify strategies and sales techniques they fiercely argued against at previous employers, coming around the moment their career depended on it. These are good, honest people. But self-interest is a freight train of persuasion. When you accept how powerful it is you become more skeptical of promotion, and more empathetic to those doing the promoting.
• Room for error is underappreciated and misunderstood.Since the biggest gains occur the most infrequently – either because they don’t happen often or because they take time to compound – the person with enough room for error in part of their strategy to let them endure hardship in the other part of their strategy has an edge over the person who gets wiped out, game over, insert more tokens, at the first hiccup.

Ironies of Luck 

https://www.collaborativefund.com/blog/ironies-of-luck/

• Luck is the flip side of risk. You cannot understand one without appreciating the other.
• If risk is what happens when you make good decisions but end up with a bad outcome, luck is what happens when you make bad or mediocre decisions but end up with a great outcome. They both happen because the world is too complex to allow 100% of your actions dictate 100% of your outcomes. They are mirrored cousins, driven by the same thing: You are one person in a 7 billion player game, and the accidental impact of other people’s actions can be more consequential than your own.
• But experiencing risk makes you recognize that some stuff is out of your control, which is accurate feedback that helps you adjust your strategy. Experiencing luck doesn’t. It generates the opposite feedback: A false feeling that you are in control, because you did something and then got the outcome you wanted. Which is terrible feedback if you’re trying to make good, repeatable long-term decisions.

This is the irony of investing: Risk and luck are different sides of the same coin, but we treat one as critically important, and the other like it doesn’t exist – at least for you, when you succeed. This is partly about ego, but even more about the desire to identify patterns of what works, relishing the thought of repeating those actions to win again in the future. We love narratives that explain things, and the most comfortable narrative is, “I’m good at this and will continue to be good at it.”

• Good investors attempt to quantify risk. They should do the same for luck.
• People are good at discounting risks that threaten the continuation of their past success. They are equally good at discounting the role of luck in their past success. What’s the saying? “Like every self-made man, he worshiped his creator.” Calling someone’s past success lucky is insulting, because it undermines the effort that person put into their endeavor. But risk doesn’t care about how much effort you put into something, and neither does luck. Both just show up, unannounced, eager to humble you. The only difference is that risk humbles you as soon as it arrives, while luck humbles you down the road, once it vanishes, leaving you with only the memories you shared together. You can manage risk and luck. You can ignore risk and luck. But you can’t get rid of either.
• Experiencing risk reduces confidence when it should merely highlight reality, which can make people more conservative than they should be. Luck increases confidence without increasing ability, which also magnifies how people respond to it. Not only are you tempted to repeat the actions that brought you your lucky break. But you’ll do so with gleeful confidence and all its baggage: leverage, no room for error, and a blunted ability to respond to negative feedback when your luck runs out.

Overcoming your demons 

https://www.collaborativefund.com/blog/overcoming-your-demons/

• You never know what struggles people are hiding. 
• Inside of every struggle is the seed of some of the happiest moments of your life. The psychology of happiness tells us there’s less than a dozen things that bring people lasting joy. One of them is progress in what you’re pursuing. The more progress, the more happiness. And the most progress is possible in endeavors where you’re starting in a hole, deep in the red, with a big gap between your current position and the end goal of what’s attainable. It’s like having a lower cost basis.

Betting on things that never change https://www.collaborativefund.com/blog/betting-on-things-that-never-change/

• In the last 100 years we’ve gone from horses to jets and mailing letters to Skype. But every sustainable business is accompanied by one of a handful of timeless strategies:
• Lower prices.
• Faster solutions to problems.
• Greater control over your time.
• More choices.
• Added comfort.
• Entertainment/curiosity.
• Deeper human interactions.
• Greater transparency.
• Less collateral damage.
• Higher social status.
• Increased confidence/trust.
• You can make big, long-term bets on these things, because there’s no chance people will stop caring about them in the future.

Expiring vs Long Term Knowledge https://www.collaborativefund.com/blog/expiring-vs-lt-knowledge/

• Long-term knowledge is harder to notice because it’s buried in books rather than blasted in headlines. But its benefit is huge. It’s not just that long-term knowledge rarely expires, letting you accumulate it over time. It compounds over time. Expiring knowledge tells you what happened; long-term knowledge tells you why something happened and is likely to happen again. That “why” can translate and interact with stuff you know about other topics, which is where the compounding comes in.

What I Believe Most

https://www.collaborativefund.com/blog/what-i-believe-most/

1. Investing is a game of probabilities, and almost all probabilities are less than 100%. So you’re going to be wrong and lose sometimes, even when the odds were in your favor. The late investor Peter Bernstein: “You just have to be prepared to be wrong and understand that your ego had better not depend on being proven right. Being wrong is part of the process. Survival is the only road to riches.”
2. History is mostly the study of unprecedented events, ironically used as a map of the future. Stuff evolves, tastes change, paradigms shift. So what worked in the past may not work today or tomorrow. The most valuable part of history is studying how people behaved when something unprecedented happened. It’s the most consistent thing over time.
3. The coziest spot is under the warm blanket of ideology. It offers easy answers to difficult problems. But, man, is it dangerous, especially in an adapting world. Great stuff happens at the intersection of “Confident enough to take a stand” and “Humble enough to admit when something I don’t want to be true is true.”
4. The best results happen when your interests align with others’.
5. Many failures can be traced to the pointless pursuit of arbitrary benchmarks.
6. The worst business and investing traits are ego, single-outcome modeling, and pessimism. 
7. Incentives are the strongest force in the world. They cause otherwise good people to do awful things, and vice versa. They’re also the most misunderstood and counterintuitive force in business. Brent Beshore: “I want to know what motivates people. The problem is not that they won’t tell me, because they will. The problem is that none of us know the truth, even about ourselves. The only thing to do is watch someone over a very long period of time and try to piece it together.”
8. Investors are always looking for factors that select for above-average investments. To me, the best one is “Things that feel uncomfortable to the point of crazy.” It doesn’t work every time, of course. But in hindsight the root of most successful investments is the guts to back something that made little sense to others. Lack of enthusiasm or understanding among competitors is what seeds the potential for something big.
9. Amazing things rarely happen outside of teams.
10. There are five sources of edge: 1) Learn faster than your competition, 2) empathize with stakeholders more than your competition, 3) communicate more effectively than your competition, 4) be willing to fail more than your competition, and 5) wait longer than your competition.

The Four Fundamental Skills of All Investing https://www.collaborativefund.com/blog/the-four-fundamental-skills-of-all-investing/

• In the book Succeeding, John Reed wrote one of the smartest things I’ve ever read:

“When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles – generally three to twelve of them – that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.”

1. The ability to distinguish “temporarily out of favor” from “wrong.”

2. The willingness to adapt views you wish were permanent. There are a set of truly timeless investing ideas. But most of what guides us are beliefs that reflect what we’ve happened to experience in the narrow view of our own lives.

3. The ability to be comfortable being miserable. Returns do not come for free. They demand a price, and they accept payment in uncertainty, confusion, short-term loss, surprise, nonsense, stretches of boredom, regret, anxiety, and fear. Most markets are efficient enough to not offer any coupons. You have to pay the bill.

4. The ability to distinguish when analytics vs. psychology is necessary.

Competitive Advantage https://www.collaborativefund.com/blog/sustainable-sources-of-competitive-advantage/

• Learn faster than your competition.
• Empathize with customers more than your competition.
• Communicate more effectively than your competition.
• Be willing to fail more than your competition.
• Wait longer than your competition.

The Psychology of Money 

• If there’s a common denominator in these, it’s a preference for humility, adaptability, long time horizons, and skepticism of popularity around anything involving money. Which can be summed up as: Be prepared to roll with the punches.
• Investing is one of the only fields where 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. There will never be a story of a Grace Groner performing heart surgery better than a Harvard-trained cardiologist. Or building a faster chip than Apple’s engineers. Unthinkable.
• That’s because investing is not the study of finance. It’s the study of how people behave with money. And behavior is hard to teach, even to really smart people. You can’t sum up behavior with formulas to memorize or spreadsheet models to follow. Behavior is inborn, varies by person, is hard to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.
• 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.

1. Earned success and deserved failure fallacy: 

• A tendency to underestimate the role of luck and risk, and a failure to recognize that luck and risk are different sides of the same coin.
• I like to ask people, “What do you want to know about investing that we can’t know?”
• People’s lives are a reflection of the experiences they’ve had and the people they’ve met, a lot of which are driven by luck, accident, and chance. The line between bold and reckless is thinner than people think, and you cannot believe in risk without believing in luck, because they are two sides of the same coin. They are both the simple idea that sometimes things happen that influence outcomes more than effort alone can achieve.

2. Cost avoidance syndrome: 

• A failure to identify the true costs of a situation, with too much emphasis on financial costs while ignoring the emotional price that must be paid to win a reward.
• There are hidden costs that need to be paid 
• Monster Beverage stock rose 211,000% from 1995 to 2016. But it lost more than half its value on five separate occasions during that time. That is an enormous psychological price to pay. Buffett made $90 billion. But he did it by reading SEC filings 12 hours a day for 70 years, often at the expense of paying attention to his family. Here too, a hidden cost.
•  Scott Adams once wrote: “One of the best pieces of advice I’ve ever heard goes something like this: If you want success, figure out the price, then pay it. It sounds trivial and obvious, but if you unpack the idea it has extraordinary power.” 
• A key point here is that few things in money are as valuable as options. The ability to do what you want, when you want, with who you want, and why you want, has infinite ROI.

Paradox of Wealth

• The paradox of wealth is that people tend to want it to signal to others that they should be liked and admired. But in reality those other people bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth solely as a benchmark for their own desire to be liked and admired.
• The point is recognizing that people generally aspire to be respected by others, and humility, graciousness, intelligence, and empathy tend to generate more respect than fast cars.
• Everyone just believes what they want to believe, even when the evidence shows something else. Stories over statistics. Accepting that everything involving money is driven by illogical emotions and has more moving parts than anyone can grasp is a good start to remembering that history is the study of things happening that people didn’t think would or could happen. This is especially true with money.

Things change. And it’s hard to make long-term decisions when your view of what you’ll want in the future is so liable to shift.

• the first rule of compounding: Never interrupt it unnecessarily.
• Build in room for error and never have too much devotion to one goal, one path, or one outcome. 

5. Anchored-to-your-own-history bias: 

• Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works.
• If you were born in 1970 the stock market went up 10-fold adjusted for inflation in your teens and 20s – your young impressionable years when you were learning baseline knowledge about how investing and the economy work. If you were born in 1950, the same market went exactly nowhere in your teens and 20s:
  • Only lived experience can genuinely recreate the emotion felt during different times. The problem is everyone needs a clear explanation of how the world works to keep their sanity. 
  • So they use the lessons of their own life experiences to create models of how they think the world should work – particularly for things like luck, risk, effort, and values.
  • And that’s a problem. When everyone has experienced a fraction of what’s out there but uses those experiences to explain everything they expect to happen, a lot of people eventually become disappointed, confused, or dumbfounded at others’ decisions.

6. Historians are Prophets fallacy: 

• Not seeing the irony that history is the study of surprises and changes while using it as a guide to the future. An overreliance on past data as a signal to future conditions in a field where innovation and change is the lifeblood of progress.
• The 401(K) is 39 years old – barely old enough to run for president. The Roth IRA isn’t old enough to drink. So personal financial advice and analysis about how Americans save for retirement today is not directly comparable to what made sense just a generation ago. Things changed. The venture capital industry barely existed 25 years ago. There are single funds today that are larger than the entire industry was a generation ago.
• The most important driver of anything tied to money is the stories people tell themselves and the preferences they have for goods and services. Those things don’t tend to sit still. They change with culture and generation. And they’ll keep changing.
• The mental trick we play on ourselves here is an over-admiration of people who have been there, done that, when it comes to money. Experiencing specific events does not necessarily qualify you to know what will happen next. In fact it rarely does, because experience leads to more overconfidence than prophetic ability.
• That doesn’t mean we should ignore history when thinking about money. But there’s an important nuance: The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tends to be stable in time. The history of money is useful for that kind of stuff. But specific trends, specific trades, specific sectors, and specific causal relationships are always a showcase of evolution in progress.

7. The seduction of pessimism in a world where optimism is the most reasonable stance.

• One is that money is ubiquitous, so something bad happening tends to affect everyone, albeit in different ways. pessimism requires action – Move! Get out! Run! Sell! Hide! Optimism is mostly a call to stay the course and enjoy the ride. So it’s not nearly as urgent
• 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.
• We’ve evolved to treat threats as more urgent than opportunities. Buffett says, “In order to succeed, you must first survive.”

8. Underappreciating the power of compounding, driven by the tendency to intuitively think about exponential growth in linear terms.

• The punchline of compounding is never that it’s just big. It’s always – no matter how many times you study it – so big that you can barely wrap your head around it. 
• If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (it’s 134,217,728).
• Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that kill your confidence when they end. It’s about earning pretty good returns that you can stick with for a long period of time. That’s when compounding runs wild.

9. Attachment to social proof in a field that demands contrarian thinking to achieve above-average results.

• Anything worthwhile with money has high stakes. High stakes entail risks of being wrong and losing money. Losing money is emotional. And the desire to avoid being wrong is best countered by surrounding yourself with people who agree with you. Social proof is powerful. Someone else agreeing with you is like evidence of being right that doesn’t have to prove itself with facts. Most people’s views have holes and gaps in them, if only subconsciously. Crowds and social proof help fill those gaps, reducing doubt that you could be wrong.
• Real contrarianism is when your views are so uncomfortable and belittled that they cause you to second guess whether they’re right. Very few people can do that. But of course that’s the case. Most people can’t be contrarian, by definition. Embrace with both hands that, statistically, you are one of those people.

11. The social utility of money coming at the direct expense of growing money; wealth is what you don’t see.

• 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
• We tend to judge wealth by what we see. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. 
• 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.

12. A tendency toward action in a field where the first rule of compounding is to never interrupt it unnecessarily.

• When it’s hard to distinguish broken from temporarily out of favor, the tendency is to default to the former, and spring into action. Makes sense for fixing a sink but not always in the investing world.

13. Underestimating the need for room for error, not just financially but mentally and physically.

• Room for error lets you endure, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor. The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound. So the person with enough room for error in part of their strategy to let them endure hardship in the other part of their strategy has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong.
• People underestimate the need for room for error in almost everything they do that involves money. Two things cause this: One is the idea that your view of the future is right, driven by the uncomfortable feeling that comes from admitting the opposite. The second is that you’re therefore doing yourself economic harm by not taking actions that exploit your view of the future coming true.
• I know several investors who quit after losses because they were exhausted. Physically exhausted. Spreadsheets can model the historic frequency of big declines. But they cannot model the feeling of coming home, looking at your kids, and wondering if you’ve made a huge mistake that will impact their lives.

14. A tendency to be influenced by the actions of other people who are playing a different financial game than you are.

• 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.
• Personal finance is deeply personal, and one of the hardest parts is learning from others while realizing that their goals and actions might be miles removed from what’s relevant to your own life.

15. An attachment to financial entertainment due to the fact that money is emotional, and emotions are revved up by argument, extreme views, flashing lights, and threats to your wellbeing.

• I’ve found, when making money decisions to constantly remind yourself that the purpose of investing is to maximize returns, not minimize boredom. Boring is perfectly fine. Boring is good. If you want to frame this as a strategy, remind yourself: opportunity lives where others aren’t, and others tend to stay away from what’s boring.
• Why does financial news of seemingly low importance overwhelm news that is objectively more important? Because finance is entertaining in a way other things – orthodontics, gardening, marine biology – are not.  

16. Optimism bias in risk-taking, or “Russian Roulette should statistically work” syndrome: An over attachment to favorable odds when the downside is unacceptable in any circumstance.

• Nassim Taleb says, “You can be risk loving and yet completely averse to ruin.”… Never multiply by zero 
• The idea is that you have to take risk to get ahead, but no risk that could wipe you out is ever worth taking. The odds are in your favor when playing Russian Roulette. But the downside is never worth the potential upside.
• A key point here is that few things in money are as valuable as options. The ability to do what you want, when you want, with who you want, and why you want, has infinite ROI.

18. Denial of inconsistencies between how you think the world should work and how the world actually works, driven by a desire to form a clean narrative of cause and effect despite the inherent complexities of everything involving money

• Accepting that everything involving money is driven by illogical emotions and has more moving parts than anyone can grasp is a good start to remembering that history is the study of things happening that people didn’t think would or could happen. This is especially true with money.

20. The three-month bubble: 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.

• Believing that what just happened will keep happening shows up constantly in psychology. We like patterns and have short memories. Every big financial win or loss is followed by mass expectations of more wins and losses.
• 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. But even when something does happen again, most of the time it doesn’t – or shouldn’t – impact your actions in the way you’re tempted to think, because most extrapolations are short term while most goals are long term. A stable strategy designed to endure change is almost always superior to one that attempts to guard against whatever just happened happening again.