In 2018 Morgan Housel (ex-WSJ columnist and Collaborative Fund partner) wrote a report outlining the most important flaws, biases, and causes of “Bad Behaviour” affecting people’s dealing with their money, the report became very popular, so he decided to write a book and deep dive into those topics. These are some notes from the book:
- No one is crazy: Money decisions are hard and some biases are “hardwired” into our own perceptions and experiences, but “no one is crazy”.
- Luck and Risk: We should avoid confusing luck with good judgment and bad outcomes with bad judgment. This topic is what Annie Duke calls “resulting” in her book Thinking in Bets.
- Never Enough: When setting financial goals, know when enough is enough. Know when to stop the goal post from moving.
- Confounding Compounding: Basic finance but highly underrated point, just slightly above average but constant and consistent returns are very powerful.
- Getting Wealthy vs Staying Wealthy:Never risk the option to be around long enough for compounding biggest benefits to take effect.
- Tails you Win: You have to get used to the fact that big returns come from tail events. You can be wrong half the time and still make a fortune (Avoid Loss Aversion , take risks)
- Freedom: Time is the highest dividend money pays
- Man in the Car Paradox: Money rarely gains the admiration we imagine.Being nice does.
- Wealth is what you don’t see: The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razors edge of insolvency.
- Save: That’s it. Just Save. It will give you flexibility and the chance to wait for good opportunities in your career and in your investments.
- Reasonable vs Rational: Do not aim to be coldly rational when making financial decisions. Aim to be just pretty reasonable. Reasonable is more realistic, and you have a better chance of sticking with it for the long run.
- Surprise: Few things stay the same for very long, wich means we can’t treat historians as prophets. That doesn’t mean we should avoid history when 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 tend to be stable in time. The history of money is useful for that kind of stuff.
- Room for Error: The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance are an ever present part of life. Margin of Safety is the only effective way to safely navigate a world that is governed by odds, not certainties. You have to take risks to get ahead, but no risk that can wipe you out is ever worth taking: You can be risk loving and yet completely averse to ruin.
- You’ll change: Avoid Sunk Costs fallacy and adjust your strategy or financial decisions as necessary.
- Nothing is Free: Returns require to accept volatility as the price you have to pay. Market returns are never free and never will be. They demand you pay a price, like any other product.
- You and Me: Identify what is your personal investment strategy i.e. what “game” are you playing and avoid taking advice from people playing a different game that yours.
- 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 place in our hearts. The short sting of pessimism prevails while the powerful pull of optimism goes unnoticed. Once again , we should be care of loss aversion.
- When you’ll believe anything: 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. As has been studied extensively we frequently fall prey to Confirmation Bias and Hindsight Bias
The book ends with two additional chapters , chapter 19 summarizes the previous points. And chapter 20 gives an account of how the author manages his finances when it comes to savings and investing.
At the end of the book there is one additional Chapter that gives an account of why the average us consumer think the way they do (from an Historical Perspective).
I enjoyed the book, it does a good work summarizing some of the most common cognitive bias applied to finance and money.