💸 Takeaways from Psychology of Money

These are just the ideas and my thoughts I want to reference again in the future. Still working through the book.

Money related experiences during teens and twenties have large impact on future financial decisions. I should reevaluate my experiences during that time and how they’re impacting me.

Hearing bill gates’ story about wanting to start a business at a young age was inspiring, but specifically how it was centered around his interests. I often struggle between wanting to start a business that will succeed or a business I will enjoy, implicitly creating a dichotomy in my head. Instead I should look for a business that can meet both criteria. I think I avoid doing that because it’s hard, but this is a reminder that I want to step towards a life that I’ll enjoy. Otherwise, I’m getting another job with better perks. I often hear that starting a business is hard and requires perseverance to achieve success. You know what makes perseverance easy? Liking what you do.

Poker and league taught me valuable lessons about evaluating my decisions. Poker taught me that making good decisions can lead to bad outcomes due to risk and bad decisions can lead to good outcomes due to luck. The most important thing is to consistently make the right decision because it’ll work out in the long term. League taught me a similar lesson but within a more dynamic system. There are teammates and opponents. The known and hidden information is vastly greater. It was a good stepping stone to evolve that framework. However, both games have explicit outcomes that help provide long term feedback, bankroll and rank respectively. I’ve struggled to translate this framework to my day to day life. I think in particular due to the lack for explicit feedback. Or if there is explicit feedback, it doesn’t appear on a consistent basis. As a result, I’ve fallen back on the lazy style of thinking: if the outcome is good, I made good decisions; if the outcome is bad, it’s the fault of factors outside of my control. Don’t get me wrong, I don’t do this all the time, but this is something I have noticed myself occasionally doing unconsciously. This is a good reminder to bring that framework back into my life.

As a follow up to applying the decision evaluation framework to my life, I should also use it on my information diet. The book calls out how stories tend to bias towards successful outcomes as opposed to correct decision making. Ideally, most successful stories will be the result of good decision making, but it’ll also include bad takeaways that often lead to bad outcomes, since sometimes success is simply due to luck. I need to consciously and rigorously evaluate stories to ensure I apply some basic filtering before ingesting the lessons.

A good strategy to avoid making takeaways that might not be good decisions is to avoid evaluating small samples, like extreme outcomes. Related, a good strategy for making typically good takeaways is to evaluate large samples of scenarios, like the median part of a bell curve.

Enough is a powerful concept that I need to consciously think about periodically. Otherwise, I tend to fall into the hedonic treadmill in various aspects of life (wealth, career, experiences, etc). A related consideration is to truly consider if I want or want to do something. It’s easy for me to go follow momentum and do things that I don’t care for.

“Don’t sacrifice what you have and need for what you don’t have and don’t need.” This is a powerful statement I hadn’t considered before. I tend to always look forward and assume most things I have are worth risking to achieve what I consider my final destination (FIRE with $4-5m). I’m not so risky that I put everything on the line, but I’m definitely more blasé than I should be.

Reminder that compounding is the best way to grow funds. However, my main goal is to have a nest egg large enough that I have the freedom to pursue any job or project I want. Relying on compounding to build that nest egg will unfortunately take so long that I might not have those interests anymore. It is a good reminder that my nest egg is large enough to keep growing IF I can just live off of the salary I make.

Tail outcomes drive most of the returns from portfolios. This is generally understood for VC, but I didn’t realize how much it applies to standard index funding. A mistake that I probably make is not investing enough on a regular basis. I currently only do this with the 401k. Besides that I mainly dump money into my accounts when I get a bonus.

The book also implied that tail events also apply to other aspects of life. I need to evaluate this thought further, but let’s assume it’s true for now. It suggested that only a handful of projects stand out in a career or only a handful of projects even standout within a company. This seems to align with the Pareto principle. An underlying implication was that it’s difficult to predict what will or will not work in any situation. A decent strategy is to take your best guess and have a bias towards action because you will only get real world feedback once the thing is created. In other words, don’t spend a long time theorizing if a product will be useful to users, but instead you should build it quick and have users validate the benefit. Or, don’t spend a long time figuring out the architecture or the way to code a project, but instead take your best guess and build it. In the process, you’ll find where your hypotheses were right or wrong. This seems generally valid. I’m sure it doesn’t apply to all situations, but I’d like to think it’s more often the right strategy.

In my opinion, freedom is the Holy Gail of life because it unlocks so much happiness. I’ve recently started thinking about how I can introduce freedom into my work, since so much of time is spent there. For most of my career, I’ve prioritized having a high paying job because it allows me to take care of the people that matter most to me. Over time though, the stress from the job and lack of control in picking that job has started weighing on me. One of the internal conflicts that has dominated my mind lately has been switching to a job that I’d enjoy more but will most likely hurt the timeline of my FIRE goals. More importantly, a lower paying job will mean I don’t get to help the people I love as much. I’m leaning towards taking the lower paying job because this isn’t a permanent decision, and high paying jobs will always be waiting for me. At the very least, it would offer a break and give me a sense of freedom over my job.

The book raised an interesting point that few surprising tail events have been responsible for shaping our future (hitler starting the holocaust, Edison inventing uses for electricity, etc). These events also shaped our investing framework and returns, but they were all unpredictable. As a result, we should use further back points in history to find general takeaways and recent historical data to develop tactical strategies. Tangentially related, a fun thought experiment is to think about potential events that didn’t occur, which would’ve had a similar sized impact on our lives, and how different our lives could be. This is particularly fun when thinking about technology.

People change. Goals change. It’s hard to predict you’ll actually want what you think you want. Will I actually want to start a company or join a small startup? People can easily realize that they’ve changed over time, but they have a hard time recognizing that they’ll continue to change. People always think they’ve finally arrived at their “final version” in the present. This is a big motivator for me to write more. By writing, I’ll be able to capture my essence from moments across my life, which will allow me to see how I’ve evolved over time.

Sunk cost fallacy. I tend to stick to my old decisions longer than I should vs always evaluating decisions in the moment. It’s a delicate balance between changing too much based on emotions vs sticking with a strategy that’s no longer working.

Many people with differing goals and strategies participate in the stock market. A company’s price reflects the sum of their decisions. You cannot assume everyone is thinking about the price with the same approach you. You have to do your own analysis. Otherwise you can think