The Psychology of Money Book Summary

Everyone has different experiences with money based on their upbringing, circumstances, and place in history. This leads to very different beliefs and behaviors around money, even if on the surface they seem illogical or "crazy" to others. Two people can look at the same facts or event but interpret them very differently based on their own unique lens. Rather than judging, the key is to recognize that everyone's views make sense to them based on their personal experiences. What seems crazy to you might make perfect sense to me.

Section: 1, Chapter: 1

The distribution of success isn't even - a small number of outliers have a disproportionate impact. Consider:

• Venture capital: 65% of investments lose money, 4% earn 10x+, 1% earn 50x+. That tiny minority generates most returns.
• Stock markets: Less than 10% of public companies account for all the market's gains over time.
• Art: Most works have little value, but the tiny number that are considered masterpieces drive the market.

In many fields, a tiny proportion of successes explain the vast majority of results. Success is often driven by gaining exposure to such "tail events" - outcomes that are statistically unlikely but enormously impactful.

Section: 1, Chapter: 6

True wealth is having control over your time. It provides:

• Freedom to do what you want, when you want, with who you want, for as long as you want
• The ability to say no to things you don't want to do
• Flexibility in the face of an uncertain and always-changing world
• The opportunity to wait for opportunities to come to you, rather than chasing every option

Money's greatest intrinsic value - and this is something that can't be overstated - is its ability to give you control over your time.

Section: 1, Chapter: 7

Wealth is hidden, not flaunted. It's the investments, cash, and assets you choose not to spend. Consider:

• A car or jewelry quickly converts wealth into something else. You had cash but now have a deprecating asset.
• Many rich people are living on the edge, spending most of what they earn. Their visible riches don't equal wealth.
• Wealth is financial assets that haven't yet been converted into the stuff you see.
• The only way to be wealthy is to not spend the money that you do have. It's not just the only way to accumulate wealth; it's the very definition of wealth.

True wealth is not about what you spend but what you don't spend. It's all the money you haven't converted into a depreciating asset.

Section: 1, Chapter: 9

Investment returns are important. But your savings rate - how much of your income you keep and invest - is far more important. Consider that:

• There's an upper limit to how much your investments can realistically return. Most people can't sustainably earn more than 8-12% per year.
• But there's no limit to how much you can save. If you save 50%+ of your income, you can become wealthy on even modest investment returns.
• You have far more control over your savings rate than your investment returns.

Yes, great investment returns are wonderful. But a high savings rate is in your control and has a huge impact on building wealth.

Section: 1, Chapter: 10

"Past A Certain Level Of Income, What You Need Is Just What Sits Below Your Ego."

We all have basic material needs. But beyond a certain income level, additional spending is more about ego than necessity. It's not about meeting your needs; it's about showing others how much you have. The key to building wealth is recognizing where that line is and being willing to suppress your ego.

The author uses the story of a janitor secretly amassing an $8 million portfolio to illustrate this point. Despite a modest income, the janitor became wealthy by living frugally and consistently investing his surplus. He suppressed ego and lived below his means.

Section: 1, Chapter: 10

History is a long series of events that seemed unlikely or impossible right up until they happened. This is true in investing too - the most momentous events often come out of nowhere:

• The biggest stock market crashes, like 1987 and 2008-09 had no clear warning signs
• The best investing decades often follow the worst. The 2010s bull market arose from the ashes of the financial crisis
• Innovations like the internet and smartphone have changed the world in ways few could have predicted

It's easy to use historical data to estimate the probability of future events. But never forget that the most impactful events are often ones that never happened before and seemed unimaginable at the time.

Section: 1, Chapter: 12

A long-term outlook is a key investing advantage, allowing compounding to work wonders. But long-term planning is harder than it seems because the world changes constantly:

• Many common financial products, like the 401(k) and Roth IRA, didn't exist a few decades ago
• Few professions or industries look the same in 2020 as they did in 1980 - some didn't even exist
• As individuals, our goals and desires change as we age and have new experiences

It's easy to project the past forward. But the future is never just a continuation of the past. The world changes too much and too quickly. The best you can do is make a plan that gives you options, flexibility, and resilience as events unfold.

Section: 1, Chapter: 14

"Sunk Costs - Anchoring Decisions To Past Efforts That Can't Be Refunded - Are A Devil In A World Where People Change Over Time"

The sunk cost fallacy is powerful. We tend to stick with jobs, investments, and relationships because of how much we've already put into them. We're anchored to past commitments.

But when the world changes, you have to be willing to change too. Economies evolve, values shift, and people grow in unforeseen ways. Embracing the idea that sunk costs should often be abandoned and that you'll change in unforeseeable ways is an important part of navigating life.

Section: 1, Chapter: 14

All investment returns, job opportunities, and exciting new ventures have a cost. Sometimes that cost is explicit - the price you pay for a stock. But often the cost is hidden:

• The volatility and drawdowns you have to endure to earn equity returns
• The time and frustration of building a new skill to earn a promotion
• The sacrifices and risks you take to start a new business

If you want to earn above-average returns, you have to be willing to endure above-average discomfort and uncertainty. Outsized rewards demand outsized risks and sacrifices. Too many people ignore this, wanting the reward without the risk.

Section: 1, Chapter: 15

It's easy to envy the returns of great investors. But most people overlook the hardships they endured. For example:

• Warren Buffett has seen his company stock decline 50%+ three times in his career
• Charlie Munger got divorced in the 1950s and calls that decade his "worst decade"
• Many fund managers have lost most of their assets after several bad years

Earning great returns seems exciting and glamorous. But in reality, it comes with immense volatility, drawdowns, and personal hardships. Appreciating the real cost of returns and treating that cost as a fee rather than a fine is crucial.

Section: 1, Chapter: 15

When making investment decisions, it's easy to be influenced by the actions of other investors. But problems arise when you mimic others without considering their circumstances:

• A young investor saving for retirement has different goals and time horizons than a retiree who needs to live off his portfolio
• A hedge fund using leverage and complex derivatives is playing a different game than an average investor
• A day trader jumping in and out of stocks cares little for long-term business fundamentals

If you don't understand their unique circumstances and how they differ from yours, you're liable to make costly mistakes by following a playbook not suited to your situation.

Section: 1, Chapter: 16

Despite the real-world evidence that things tend to improve over time, pessimism always sounds more intelligent and insightful than optimism. Why?

• Pessimism sounds like someone trying to help you, while optimism sounds like a sales pitch
• Pessimists often extrapolate current trends without accounting for how reliably markets adapt
• Progress happens too slowly to notice, but setbacks happen too quickly to ignore
• Pessimistic views warn of risks to protect you, while optimism focuses on opportunities that may not pan out

Tempered optimism - expecting things to improve but at a gradual, uneven pace - is usually the best stance.

"Pessimism Just Sounds Smarter And More Plausible Than Optimism"

Section: 1, Chapter: 17

No one has a complete, unbiased view of the world. We all see reality through the lens of our own experiences, which are limited:

• A child doesn't understand how their parents earn a paycheck or pay a mortgage
• An American who's never left the country has a very limited view of how most of the world lives
• Even experts in a field like economics have blind spots and areas of ignorance

Despite these limitations, our minds are adept at constructing narratives to make sense of the world. We connect the dots between the things we do know, filling in the gaps with speculation and assumption. The result is the illusion of knowledge - believing we understand more than we do.

Section: 1, Chapter: 18

The author shares his personal investing philosophy, which may seem counterintuitive:

• He and his wife keep a year of expenses in cash at all times, accepting the opportunity cost vs. higher returns
• They own their house without a mortgage, despite a mortgage's potential investment benefits
• All their stock investments are in index funds vs. actively picking stocks

On paper, these choices may not maximize returns. But they help the author and his wife sleep at night, which he argues is the whole point - not earning the highest returns, but earning pretty good returns while being able to enjoy life and minimize worry.

"Define the cost of success and be ready to pay it."

Section: 1, Chapter: 20