
April 27, 2020
The Psychology of Money | Morgan Housel on Infinite Loops Podcast
Check out Infinite Loops Episode Page and Show Notes
Key Takeaways
- The psychological element of money explains it’s taboo; emotions like embarrassment and ego are involved with what people do with their money
- Money and sports are non-violent forms of figuring out where you stand in society
- The best value money can provide to you is the freedom to control your time and do whatever you like, this brings lasting happiness
- As you get more successful, the goal post keeps moving, and you keep chasing it
- The most important financial skill: Getting the goal post to stop moving
- When choosing your life partner, it’s important they are in sync with your expectations and style of living
- The behavioral side of investing is the most important: learn about your emotions, your endurance and how you deal with volatility
- Advice for fresh college graduates – Learn about 2 topics: health and money – here is why:
- They will influence your life greatly regardless of your interest in them
Books Mentioned
- In The Bonfire of the Vanities – author Tom Wolfe talks about how a lot of the super-rich masters are actually miserable
- In The Hypomanic Edge: The Link Between (a Little) Craziness and (a Lot of) Success in America, author John D. Gartner discusses how genes may be a factor in American success
Intro
- Morgan Housel (@morganhousel) is a partner at the Collaborative Fund
- Checkout his upcoming book: The Psychology of Money: Timeless lessons on wealth, greed, and happiness
- Hosts – Jim O’Shaughnessy (@jposhaughnessy) & Jamie Catherwood (@jfc_3_)
Morgan’s Upcoming Book
- The title of the book is inspired by Charlie Munger’s famous speech The Psychology of Human Misjudgement
- The book takes a holistic view of how we think about money, not necessarily risk or investing
- There are many life lessons that can be learned from how people think about money, greed, relationships, and networks
Money is a Taboo Topic
- The psychological element of money explains it’s taboo; emotions like embarrassment and ego are involved with what people do with their money
- Additionally, money is involved with any decision you make (e.g. accepting a job offer or not, marrying someone, etc.)
- Many activities have a visible impact (going to the gym for example), but money is hidden – you don’t see bank accounts or brokerage statements
- So people can look up to someone’s physique, writing, creativity, etc. but not their money activities
- Some people talk about being open on money matters, but they would never follow up with sharing their income statements
- Besides, being full transparent about money comes with repercussions – For instance, workplace fairness
- One exception is wealth fund managers who don’t invest personal money in the fund they manage – This is mostly a red flag
Money as a Hierarchical System
- Historically, wars were how tribes determined their status and prestige. Money and sports are non-violent forms of figuring out where you stand in society
- For instance, people view sports teams as their tribe – “My team”
- Wealth is also a way of identifying where one stands in the pecking order
- One of the reasons the mainstream media is melting down is because they are being replaced with individuals questioning their authority and instead just creating superior content
- Their high prestige is being decimated by the Internet
But Money Can Provide False Signals
- Getting a lot of social media engagement can be a false signal of what people would like to see more of
- Similarly, earning more money can represent a false signal for success and happiness
- Desiring more money is completely fine, but you have to understand what it can and can’t do for you – for example:
- Money doesn’t buy you class or friendships
- People will think highly of you when you are empathetic, nice, and providing value to the world – Not when you own a bigger house or a more expensive car
- The best value money can provide to you is the freedom to control your time and do whatever you like, and this brings lasting happiness
- Case of using a false signal of money: smart people getting into a finance career because it pays more, even though they don’t find it fulfilling
- These are brilliant minds that could have been curing cancer or developing products, instead they stare at spreadsheets all day
- As you get more successful, the goal post keeps moving, and you keep chasing it
- The most important financial skill: Getting the goal post to stop moving
Money is Subjective
- Experiences shape how people think about and manage money, with different impact on societies
- For instance, physical destruction in Europe during WWII could be a reason for moving towards a better social safety net, whereas Americans demanded lower taxes
- Social security became normal after the great depression. Taking off shoes, belts, and jackets in airports became normal after 9/11
- An interesting question is what long-standing effect will the economic impact of COVID-19 have on Americans, what will be the new normal?
- When choosing your life partner, it’s important they are in sync with your expectations and style of living
- Money matters are among the highest causes of divorce, especially in times of economic hardship. Partners being on the same page means less arguments
- Couples have different ways of handling their finances – For instance, some have merged bank accounts, others have one person handling money decisions
- For Morgan, the family house represents the top family expenditure – his reasoning
- Working from home means it’s important to have a nicer house
- It represents a way of avoiding debt and deriving satisfaction from the simpler things in life
Investing is Personal
- The behavioral side of investing is the most important: learn about your emotions, your endurance and how you deal with volatility
- Put simply: It doesn’t matter if you are the best stock picker in the world if you panic in an economic crisis
- Find something that works uniquely for you, and make it work
- Morgan prefers investing in indexes over active investing, for a simple reason:
- Lower risk tolerance – Optimizing for better sleep at night rather than for maximized annual returns
- Additionally, index funds have done well over the past 10-20 years
- An old wall-street saying: “Sell until you sleep well at night”
Additional Notes
- Advice for fresh college graduates – Learn about 2 topics: health and money – here is why:
- They will influence your life greatly regardless of your interest in them
- The biggest concepts of money are the psychological concepts
- Additionally, learn the math and mechanics of compounding
- They will influence your life greatly regardless of your interest in them