#659: The Psychology of Money

We generally tend to think of finance as a math-based field ... Finance is much closer to something like psychology where it's a soft, mushy topic with a lot of nuance... People in the United States think about money differently from people who live in other parts of the world and vice versa. It's a much more nuanced topic.

We spend so much time focusing on how to increase your income [and] how to increase your wealth, and I think it is just as important to spend time on trying to manage your expectations and keeping your expectations from growing faster than your income. Because it doesn't matter how wealthy you are—if your expectations are rising with your income, you're not going to feel any better off.

Wealth is what you don't see. Wealth is the money that you have not spent. It's the cars you didn't purchase; it's the house you didn't purchase; it's the first class upgrade that you didn't buy. It's money in the bank or invested that you have not spent yet.

Live below your means, save your money, buy a diverse low-cost portfolio, and be patient. That's like 90% of what you need to know to do well in investing over time.

If you look at who buys lottery tickets, what group of Americans buys the most lottery tickets? ... It is the poorest Americans ... They spend an average of $400 per year on lottery tickets.

Personal finance is much more personal than it is finance.

Volatility is the cost of admission to market returns ... You can do very well over a long period of time in investing, but you have to give something up for that. Like anything else in life, there's a price, and the price you have to pay is putting up with volatility and uncertainty.

The golden rule of finance is live within your means and be patient. If you can do that, you don't need to know that much more about finance to do well over a long period of time.

One of the things in finance is that you don't need to make many great decisions to do well over time; you just have to consistently not screw up. If you can consistently avoid screwing up, you'll probably do not just okay but phenomenal over time.

Is [Warren] Buffett a good investor? Yes, of course he is. But his real secret is that he's been a good investor for 80 years. That's the takeaway that we should learn from him—that time is really what drives all big success over time.

No one is more impressed with your stuff than you are, and once you realize that no one is more impressed with your stuff than you are, it takes a lot of the pressure off of the social treadmill (the rat race) of having new stuff and having fancy stuff that serves no other purpose than sending a social signal.

The market has declined on average 10% every 11 months ... It's fallen more than 20% on average every 3 years [and] more than 30% on average at least once per decade.

People should save like a pessimist, and invest like an optimist.

You can have all the financial sophistication in the world, but if you do not manage your relationship with greed and fear, it has the ability to neutralize all of the financial sophistication that you have.

People do crazy things with their money all the time ... They make just boneheaded decisions. They blow money. They make terrible investments. But no one is actually crazy. What I mean by that is when everyone makes a decision with their money in real-time, it is checking all the boxes that they need to in their head in that given moment.

If you are someone who is lucky enough to have a rising income, a rising net worth, and your expectations rise at lockstep with your wealth... you're not going to feel better off.

There's no other field other than finance where someone with no education, no background, no sophistication, [and] no training can massively outperform someone who has the best education, the best training, [and] the best background.

[Financial] bubbles cause their damage when people who are playing a long-term game take their cues from people who are rationally playing a short-term game.