Money and behaviour

Why smart people make bad decisions with money

Money is not a sum – it is behaviour. A walk through the ideas in Morgan Housel's The Psychology of Money: luck and risk, compounding, why keeping money is harder than making it, and why freedom is the real return.

Back to the episode Arrow keys or swipe

What this covers

  1. Why money is about behaviour more than arithmetic
  2. Luck and risk – the two forces we underestimate most
  3. Compounding, and why time beats returns
  4. Getting wealthy and staying wealthy are two different skills
  5. Why a few large outcomes decide the result
  6. Freedom as the real return
  7. Wealth is what you do not see

What this covers (cont.)

  1. Saving without a specific goal
  2. Room for error, and why volatility is the price you pay

Luck and risk

Compounding is about time

Time beats returns

High return, short time Lower return, long time Time →
Buffett's fortune comes first of all not from the returns being the highest, but from his having invested for over eighty years. Doubling the time does more than doubling the return.

Getting wealthy and staying wealthy

The two take opposite traits. Building something takes risk, optimism and placing bets. Keeping it takes humility, caution and assuming something will go wrong.

Two skills that pull in opposite directions

Getting wealthy

Requires taking a bet

  • Risk
  • Optimism
  • Tolerating being wrong
  • Stepping into something uncertain

Staying wealthy

Requires not taking one

  • Humility
  • Caution
  • Assuming something will go wrong
  • Doing nothing
The qualities that got someone there are not the ones that keep them there. That is why the stories of large gains that vanished again are so numerous.

Room for error

The practical consequence is to plan for the plan not holding. That means a buffer, less debt than you could carry, and expectations that survive a bad year. Not because you think it will go wrong, but because you do not know.

Wealth is what you do not see

The riches we notice are money that has been spent. Wealth is the opposite: money that has not been spent, and is therefore invisible. It is one reason we are bad at judging who is actually well off – we see the cars, not the accounts.

What the objections are

Worth knowing

Key points

  • Financial decisions are decided by behaviour, not by arithmetic.
  • Getting wealthy and staying wealthy take opposite traits: risk and caution.
  • Compounding rewards time more than it rewards high returns.
  • A handful of your decisions account for nearly the whole result.

Key points (cont.)

  • The best return money gives is control over your own time.
  • Volatility is the price of returns – not a fee you can avoid.

Questions this answers

  • Why do smart people make bad decisions with money?
  • What is the difference between getting wealthy and staying wealthy?
  • Why is compounding so powerful?
  • How much should you save?
  • How do you tell luck from skill in finance?
  • Why are we never satisfied even when we earn more?

Questions this answers (cont.)

  • What does Housel mean by wealth being what you do not see?
  • Why is volatility the price of returns rather than a penalty?

Sources

  • Morgan Housel – The Psychology of Money (2020)

Spørretimen

Read the whole thing at

www.sporretimen.no/en/episodes/psychology-of-money/