Learning about life – and music and love and eating leftovers – from the world of finance: Reflections on the Psychology of Money
During my first year at university, in Boston, I went to a lot of gigs. I was really into Britpop at the time – Blur, Oasis, Suede and Pulp in particular – and they were massive in the UK, selling out decent-sized arenas. But the beauty of seeing them in America, where they were less popular, was that they played smaller venues of less than 1000 people, right at the height of their popularity. I loved it.
I didn’t only listen to Britpop – I had my other [guilty? shameful?] pleasures, one of whom was The Offspring. I’m only slightly embarrassed to admit to liking them back then – this was in 1994-95 – but it could be worse. They weren’t (aren’t?) that bad, are they? Surely Nickelback, Matchbox Twenty and Blink 182 are worse, right?
(at the time their big hits were ‘Self-Esteem’ and ‘Come Out and Play’)
Anyway, they were far more popular than the usual British bands I went to see, and so were playing in a much bigger venue: the Worcester Centrum. My friend Simon and I – we went to quite a few concerts together – were used to venues like Avalon and Axis and we’d never heard of this one, but we went ahead and got our tickets and thought nothing else of the matter.
Anyone reading this who is from the Boston or the New England area or knows Massachusetts geography well will immediately recognise the problem we were up against. But we had no idea until a few days before the gig.
Worcester, unbeknownst to us, was 44 miles or 70 kilometres away. Maybe we knew about this ahead of time, maybe not, but that’s not the point. I’d spent my high school years in Germany and England, and spent many of my holidays in Belfast, and Simon was from Paris. We just assumed that public transport would get us to where we needed to go. We’d grown up with it, on and off.
But public transport, outside of cities in much of the US, is almost non-existent. Without a car, we had no way of getting to Worcester. There were train options, we discovered, but that would have involved having to stay overnight in a hotel or something, because there was no way to get back to Boston the same evening. We were college students, without much money. We were looking to economise wherever possible and the idea of staying in a hotel was preposterous.
(note for Boston-area readers who will protest and say ‘what about the commuter rail?’ It only ran sporadically at the time to Worcester and there were no trains coming back after 6 or 7pm at the time, and it wasn’t till late in 1996 that it ran more regularly. This gig was in winter 1995.)
Simon and I did not want to miss this show and we were determined to get there, even if we had to spend a bit of extra money to do so. We didn’t want to lose the money we’d spent on the ticket.
I was discussing this dilemma with Dave, who lived in the dorm room next to mine. He was doing an Economics degree and being from New England, knew about transport options.
‘Forget about it, it’s a sunk cost,’ he said.
‘A what? What the hell is a sunk cost?’ I asked.
He then proceeded to explain the sunk-cost fallacy to me, the ignoramus that I was. I remember his words clearly to this day: ‘Don’t go spending money in order to save money.’ The money paid for the ticket was gone. The cost was, in effect, ‘sunk.’ No amount of extra spending could justify trying to recoup the cost of the ticket, unless it was something really worth seeing. But then I think he got into ‘opportunity costs’, and what I would potentially be losing by spending even more money to salvage this ticket.
‘How much extra are you going to spend getting to Worcester on trains and a hotel? Think about how many other gigs right here in Boston, accessible by underground, you might miss out on.’
That was one of my earliest introductions to how economics can be applied to real life.
The sunk-cost fallacy can apply to so many things: investments, obviously. Who cares about how much time and energy (and money) you put into an investment, if the potential future returns don’t seem so appealing? Let it go, move on. The money is gone.
And I soon realised that it can apply to all walks of life:
* love, relationships, friendships – ‘I’ve invested 2 years of my life with this person, I can’t just throw it away now.’
* books and albums you’ve bought (in the days when people bought them) – ‘I spent $12 on this deluxe edition of Anna Karenina, I’m not going to give up.’ ‘I don’t care if I’ve listened to this Stone Temple Pilots album 13 times already and still don’t like it, I spent $15 on it, I’m going to keep listening to get my moneys’ worth.’
* leftovers in the fridge, which I’m guilty of – ‘I spent all that time and money making that lasagna, I don’t care if it’s two weeks old, I’m eating it, food poisoning be damned.’
* that half-drunk, lukewarm, poorly made martini – ‘This thing is $15, I’m not wasting it, even if it’s wretched and making me feel sick.’
* cooking - I once tried to salvage an expired box of powdered cheesecake mix – my dear Ukrainian readers, it’s best not to ask! – and in the process wasted a couple of eggs and milk when I realised that this thing was beyond salvation.
Sometimes you just have to let things go and move on.
Finance and economics are boring.
Maybe, for some.
Financial writers are dull.
No, not at all.
Financial writers have nothing to teach us about life.
Not even remotely true.
Charlie Munger, the vice chairman of Berkshire Hathaway, and long-time [business] partner/right-hand man of Warren Buffett, wrote one of the greatest all-time books on, ostensibly, ‘finance’. Yet it is so much more than that.
Poor Charlie’s Almanack: The Wit and Wisdom of Charles T Munger is chock full of priceless gems to guide you through not only the investing world, but life. Just a few bits of his advice that I try to abide by, and which I have definitely quoted on these pages before:
Munger, on coping with life’s challenges:
1 have low expectations
2 have a sense of humour
3 surround yourself with the love of friends and family
And:
‘If you always tell people why, they’ll understand it better, they’ll consider it more important and they’ll be more likely to comply.’
Look, it’s nothing profound or revelatory, just simple, basic wisdom.
In the investing world, there are some classic writers out there, and here’s just a small selection of some of my favourite classics:
The Intelligent Investor, Benjamin Graham
A Random Walk Down Wall Street, Burton Malkiel
The Devil’s Financial Dictionary, Jason Zweig
Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich, Jason Zweig
Against the Gods: The Remarkable Story of Risk, Peter Bernstein
The Investor’s Manifesto, William Bernstein
Morgan Housel is another writer whose thoughts, wisdom and guidance are full of exquisite nuggets. Regular, devoted readers will be aware of my fondness for Housel, who is one of a handful of writers who have been mentioned on these pages countless times (another is Oliver Burkeman). His first book, The Psychology of Money, isn’t due out until September. But he’s a prolific blogger, and his post of the same title is one I’ve read a few times and come back to periodically when in search of inspiration.
As much as I’d love to share a few of my other favourite Housel posts, there are just too damn many to choose from. They are usually – but not always – pretty bite-sized, quick reads, which is something I wish I could say were true about most of my posts.
The Psychology of Money is an exception, but’s full of meaningful insights. It’s soothing to come back to it periodically to re-calibrate my thoughts. I’m not alone in my viewpoint here – this particular post is regularly cited by others – not all of them finance ‘experts’ – as being one of the best out there.
The beauty of what he writes is that it’s so timeless. I’m reading a small book collection of his, Everyone Believes It; Most Will Be Wrong: Motley Thoughts on Investing and the Economy, of some of his essays and articles from his time as a writer at The Motley Fool, an investing site. Even though this collection was published in 2011 the lessons are still relevant and applicable today.
It’s obviously well worth reading the post in full: it’s a list of 20 ‘flaws, biases, and causes of bad behavior I’ve seen pop up often when people deal with money.’ At the very least, have a look at the different points to see whether any catch your eye. There are some valuable lessons to be learned here.
Just five of my favourites, the ones that always stick out, interspersed with a smattering of my thoughts:
1 Humans have ‘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.’
‘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.’
Why are people so quick to downplay the role that luck plays in our lives, especially in achieving success?
To take the words of another of my favourite journalists, Gary Younge: ‘Only the privileged and the naïve believe people’s achievements are purely the product of their own genius.’
2 Rethinking my pessimistic outlook, or as Housel puts it, ‘the seduction of pessimism in a world where optimism is the most reasonable stance.’
Regular readers will know about my pessimism, though Housel is far more balanced than I am, and any writer who gives me pause and makes me re-consider this stance is well worth my time.
I so often warn about the dangers of complacency. Perhaps I’ve not expounded on this enough, mixing up optimism and complacency. Complacency, in whatever guise – investing, your job, in a relationship – can be dangerous. But I suppose there is a way forward with something like rational, or cautious, optimism.
‘Most promotions of optimism, by the way, are rational. Not all, of course. But we need to understand what optimism is. 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. The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism. It’s not complicated. It’s not guaranteed, either. It’s just the most reasonable bet for most people. The late statistician Hans Rosling put it differently: “I am not an optimist. I am a very serious possibilist."'
3 Status anxiety and showing off, the world where FOMO rules our lives and we’re never satisfied with what we’ve got:
‘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. Cars. Homes. Vacations. Instagram photos.’
‘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.’
‘But that’s not how we think about wealth, because you can’t contextualize what you can’t see.’
4 We’re not done with optimism just yet. Maybe rational optimism isn’t quite the answer:
‘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.’
‘The odds of something can be in your favor – real estate prices go up most years, and most years you’ll get a paycheck every other week – but if something has 95% odds of being right, then 5% odds of being wrong means you will almost certainly experience the downside at some point in your life. And if the cost of the downside is ruin, the upside the other 95% of the time likely isn’t worth the risk, no matter how appealing it looks.’
‘The danger is that rational optimism most of the time masks the odds of ruin some of the time in a way that lets us systematically underestimate risk.’
Tell that to the non-mask wearing covidiots out there. Sure, there’s a 95% chance you’ll be okay, but is the 5% chance of a massive downside worth that risk? And that’s without even getting into the potential harm you’re doing to others.
5. Some of my hobby horses – cognitive bias, narrative bias, even recency bias:
‘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.
There are three parts to this:
You see a lot of information in the world.
You can’t process all of it. So you have to filter.
You only filter in the information that meshes with the way you think the world should work.
Since everyone wants to explain what they see and how the world works with clean narratives, inconsistencies between what we think should happen and what actually happens are buried.’
The post in full (again):
The Psychology of Money
Read more
Another good financial blogger with some in-built life lessons is Ben Carlson. Here he summarise the best finance books in one sentence:
‘I enjoy reading finance books but most people do not.
So to make your life easier, I’ve gone through all the classic finance books and distilled the message into a single sentence or phrase.
I would still recommend reading many of these books if you haven’t, but let’s be realistic, that’s probably not going to happen for all but the biggest finance geeks on the planet (again, that’s me).’
The Best Finance Books in One Sentence (A Wealth of Common Sense)
And:
‘Overly optimistic thinkers can experience destructive levels of disappointment when expectations do not pan out, while overly pessimistic thinkers can experience the ongoing dread of seeing and expecting problems.’
The power of positive thinking has been debunked. Try reality thinking instead (Fast Company)
I didn’t only listen to Britpop – I had my other [guilty? shameful?] pleasures, one of whom was The Offspring. I’m only slightly embarrassed to admit to liking them back then – this was in 1994-95 – but it could be worse. They weren’t (aren’t?) that bad, are they? Surely Nickelback, Matchbox Twenty and Blink 182 are worse, right?
(at the time their big hits were ‘Self-Esteem’ and ‘Come Out and Play’)
Anyway, they were far more popular than the usual British bands I went to see, and so were playing in a much bigger venue: the Worcester Centrum. My friend Simon and I – we went to quite a few concerts together – were used to venues like Avalon and Axis and we’d never heard of this one, but we went ahead and got our tickets and thought nothing else of the matter.
Anyone reading this who is from the Boston or the New England area or knows Massachusetts geography well will immediately recognise the problem we were up against. But we had no idea until a few days before the gig.
Worcester, unbeknownst to us, was 44 miles or 70 kilometres away. Maybe we knew about this ahead of time, maybe not, but that’s not the point. I’d spent my high school years in Germany and England, and spent many of my holidays in Belfast, and Simon was from Paris. We just assumed that public transport would get us to where we needed to go. We’d grown up with it, on and off.
But public transport, outside of cities in much of the US, is almost non-existent. Without a car, we had no way of getting to Worcester. There were train options, we discovered, but that would have involved having to stay overnight in a hotel or something, because there was no way to get back to Boston the same evening. We were college students, without much money. We were looking to economise wherever possible and the idea of staying in a hotel was preposterous.
(note for Boston-area readers who will protest and say ‘what about the commuter rail?’ It only ran sporadically at the time to Worcester and there were no trains coming back after 6 or 7pm at the time, and it wasn’t till late in 1996 that it ran more regularly. This gig was in winter 1995.)
Simon and I did not want to miss this show and we were determined to get there, even if we had to spend a bit of extra money to do so. We didn’t want to lose the money we’d spent on the ticket.
I was discussing this dilemma with Dave, who lived in the dorm room next to mine. He was doing an Economics degree and being from New England, knew about transport options.
‘Forget about it, it’s a sunk cost,’ he said.
‘A what? What the hell is a sunk cost?’ I asked.
He then proceeded to explain the sunk-cost fallacy to me, the ignoramus that I was. I remember his words clearly to this day: ‘Don’t go spending money in order to save money.’ The money paid for the ticket was gone. The cost was, in effect, ‘sunk.’ No amount of extra spending could justify trying to recoup the cost of the ticket, unless it was something really worth seeing. But then I think he got into ‘opportunity costs’, and what I would potentially be losing by spending even more money to salvage this ticket.
‘How much extra are you going to spend getting to Worcester on trains and a hotel? Think about how many other gigs right here in Boston, accessible by underground, you might miss out on.’
That was one of my earliest introductions to how economics can be applied to real life.
The sunk-cost fallacy can apply to so many things: investments, obviously. Who cares about how much time and energy (and money) you put into an investment, if the potential future returns don’t seem so appealing? Let it go, move on. The money is gone.
And I soon realised that it can apply to all walks of life:
* love, relationships, friendships – ‘I’ve invested 2 years of my life with this person, I can’t just throw it away now.’
* books and albums you’ve bought (in the days when people bought them) – ‘I spent $12 on this deluxe edition of Anna Karenina, I’m not going to give up.’ ‘I don’t care if I’ve listened to this Stone Temple Pilots album 13 times already and still don’t like it, I spent $15 on it, I’m going to keep listening to get my moneys’ worth.’
* leftovers in the fridge, which I’m guilty of – ‘I spent all that time and money making that lasagna, I don’t care if it’s two weeks old, I’m eating it, food poisoning be damned.’
* that half-drunk, lukewarm, poorly made martini – ‘This thing is $15, I’m not wasting it, even if it’s wretched and making me feel sick.’
* cooking - I once tried to salvage an expired box of powdered cheesecake mix – my dear Ukrainian readers, it’s best not to ask! – and in the process wasted a couple of eggs and milk when I realised that this thing was beyond salvation.
Sometimes you just have to let things go and move on.
Finance and economics are boring.
Maybe, for some.
Financial writers are dull.
No, not at all.
Financial writers have nothing to teach us about life.
Not even remotely true.
Charlie Munger, the vice chairman of Berkshire Hathaway, and long-time [business] partner/right-hand man of Warren Buffett, wrote one of the greatest all-time books on, ostensibly, ‘finance’. Yet it is so much more than that.
Poor Charlie’s Almanack: The Wit and Wisdom of Charles T Munger is chock full of priceless gems to guide you through not only the investing world, but life. Just a few bits of his advice that I try to abide by, and which I have definitely quoted on these pages before:
Munger, on coping with life’s challenges:
1 have low expectations
2 have a sense of humour
3 surround yourself with the love of friends and family
And:
‘If you always tell people why, they’ll understand it better, they’ll consider it more important and they’ll be more likely to comply.’
Look, it’s nothing profound or revelatory, just simple, basic wisdom.
The Intelligent Investor, Benjamin Graham
A Random Walk Down Wall Street, Burton Malkiel
The Devil’s Financial Dictionary, Jason Zweig
Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich, Jason Zweig
Against the Gods: The Remarkable Story of Risk, Peter Bernstein
The Investor’s Manifesto, William Bernstein
Morgan Housel is another writer whose thoughts, wisdom and guidance are full of exquisite nuggets. Regular, devoted readers will be aware of my fondness for Housel, who is one of a handful of writers who have been mentioned on these pages countless times (another is Oliver Burkeman). His first book, The Psychology of Money, isn’t due out until September. But he’s a prolific blogger, and his post of the same title is one I’ve read a few times and come back to periodically when in search of inspiration.
As much as I’d love to share a few of my other favourite Housel posts, there are just too damn many to choose from. They are usually – but not always – pretty bite-sized, quick reads, which is something I wish I could say were true about most of my posts.
The Psychology of Money is an exception, but’s full of meaningful insights. It’s soothing to come back to it periodically to re-calibrate my thoughts. I’m not alone in my viewpoint here – this particular post is regularly cited by others – not all of them finance ‘experts’ – as being one of the best out there.
The beauty of what he writes is that it’s so timeless. I’m reading a small book collection of his, Everyone Believes It; Most Will Be Wrong: Motley Thoughts on Investing and the Economy, of some of his essays and articles from his time as a writer at The Motley Fool, an investing site. Even though this collection was published in 2011 the lessons are still relevant and applicable today.
It’s obviously well worth reading the post in full: it’s a list of 20 ‘flaws, biases, and causes of bad behavior I’ve seen pop up often when people deal with money.’ At the very least, have a look at the different points to see whether any catch your eye. There are some valuable lessons to be learned here.
Just five of my favourites, the ones that always stick out, interspersed with a smattering of my thoughts:
1 Humans have ‘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.’
‘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.’
Why are people so quick to downplay the role that luck plays in our lives, especially in achieving success?
To take the words of another of my favourite journalists, Gary Younge: ‘Only the privileged and the naïve believe people’s achievements are purely the product of their own genius.’
2 Rethinking my pessimistic outlook, or as Housel puts it, ‘the seduction of pessimism in a world where optimism is the most reasonable stance.’
Regular readers will know about my pessimism, though Housel is far more balanced than I am, and any writer who gives me pause and makes me re-consider this stance is well worth my time.
I so often warn about the dangers of complacency. Perhaps I’ve not expounded on this enough, mixing up optimism and complacency. Complacency, in whatever guise – investing, your job, in a relationship – can be dangerous. But I suppose there is a way forward with something like rational, or cautious, optimism.
‘Most promotions of optimism, by the way, are rational. Not all, of course. But we need to understand what optimism is. 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. The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism. It’s not complicated. It’s not guaranteed, either. It’s just the most reasonable bet for most people. The late statistician Hans Rosling put it differently: “I am not an optimist. I am a very serious possibilist."'
3 Status anxiety and showing off, the world where FOMO rules our lives and we’re never satisfied with what we’ve got:
‘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. Cars. Homes. Vacations. Instagram photos.’
‘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.’
‘But that’s not how we think about wealth, because you can’t contextualize what you can’t see.’
4 We’re not done with optimism just yet. Maybe rational optimism isn’t quite the answer:
‘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.’
‘The odds of something can be in your favor – real estate prices go up most years, and most years you’ll get a paycheck every other week – but if something has 95% odds of being right, then 5% odds of being wrong means you will almost certainly experience the downside at some point in your life. And if the cost of the downside is ruin, the upside the other 95% of the time likely isn’t worth the risk, no matter how appealing it looks.’
‘The danger is that rational optimism most of the time masks the odds of ruin some of the time in a way that lets us systematically underestimate risk.’
Tell that to the non-mask wearing covidiots out there. Sure, there’s a 95% chance you’ll be okay, but is the 5% chance of a massive downside worth that risk? And that’s without even getting into the potential harm you’re doing to others.
If you don’t wear a mask because, odds are, you’d survive COVID— Jim Cunningham (@J1MCUNN1NGHAM) July 9, 2020
think about this
the odds also are, you’re ugly
so do us all a favor
and cover that thing up
5. Some of my hobby horses – cognitive bias, narrative bias, even recency bias:
‘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.
There are three parts to this:
You see a lot of information in the world.
You can’t process all of it. So you have to filter.
You only filter in the information that meshes with the way you think the world should work.
Since everyone wants to explain what they see and how the world works with clean narratives, inconsistencies between what we think should happen and what actually happens are buried.’
The post in full (again):
The Psychology of Money
Read more
Another good financial blogger with some in-built life lessons is Ben Carlson. Here he summarise the best finance books in one sentence:
‘I enjoy reading finance books but most people do not.
So to make your life easier, I’ve gone through all the classic finance books and distilled the message into a single sentence or phrase.
I would still recommend reading many of these books if you haven’t, but let’s be realistic, that’s probably not going to happen for all but the biggest finance geeks on the planet (again, that’s me).’
The Best Finance Books in One Sentence (A Wealth of Common Sense)
And:
‘Overly optimistic thinkers can experience destructive levels of disappointment when expectations do not pan out, while overly pessimistic thinkers can experience the ongoing dread of seeing and expecting problems.’
The power of positive thinking has been debunked. Try reality thinking instead (Fast Company)
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