The first book I finished reading this year is Psychology of Money. It’s a book that my therapist recommended to me. Just writing this makes me feel so bourgeois. There was a time in my life I would have never picked a self help book to read, let alone seek out-side help or to top it all off- talk about it public. But here we are. The young, dumb and broke me would be disappointed.
What is the book about?
The books talks about arranging personal finance in a way that works for you as an individual. Far too often finance is talked about as a mathematical and purely rational problem - calculate the amount you need to survive, take inflation into account and start saving. Invest in whatever strategy gives you the best returns and do it for a long time. This sounds logical and no one who makes more than enough to cover basic necessities should struggle with it. But so many people do. Because finance is deeply personal and just like everything personal - it is a unique challenge for everyone. Combine that with the uncertainty of life and surely there are multiple points of failure.
Your perception is your reality
“No one is crazy”
A recurring theme in the book talks about how our entire existence accounts for an infinitesimal portion of the sum total of what someone could experience. Yet, it makes up almost entirety of our decision making framework. It’s true of any part of life but nowhere is it more apparent than in finance. In fact in my own life - I come from a family where my parents have taken a lot of financial risks and sometimes over-leveraged themselves but have reaped rewards for that kind of vision. While my partner’s folks are financially conservative who have enough to live comfortably after retirement. You would think that two rational people who love and respect each other and have MBAs would be able to see the merits and demerits of both approaches. However, money remains a big point of disagreement between us and both of us struggle with getting on the same page.
Man In the Car Paradox
“Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.”
This part of the book felt like a personal attack on me. I am a car guy. I have been a car guy since I was a child. I also am an outdoors person and a lot of activities I do require me to own a car - specially post COVID. So I bought a car as soon as I got my job in B-school. I looked at many cars while making a decision. I looked i20, Aura, Jazz - cars which would do 80% of what I needed and cost very little. I looked at Sonnet, Venue - cars which could do 100% of what I needed and costed accordingly - affordable but not cheap. And I also looked at the cars I could “technically” afford- Seltos, Hector, but the opportunity cost would be felt every time I wanted to buy something else - like a phone, or a weekend getaway. Guess which one I went for - yup. You are talking to a proud owner of an MG Hector. I did it not because I needed it in the utilitarian sense of the word. I did it because I wanted to feel like I made it in life and also to let everyone else know, specially because of that. The author is right. I love and enjoy my car. But the 30% more I spent on it - I don’t love that part so much.
Reasonable > Rational
“My own view is that people are neither rational nor irrational. We are human. We don’t like to think harder than we need to, and we have unceasing demands on our attention. Seen in that light, there’s nothing surprising about the fact that the pioneer of modern portfolio theory built his initial portfolio with so little regard for his own research. Nor is it surprising that he adjusted it later. Markowitz is neither rational or irrational. He’s reasonable.”
I loved that the book talks about this. We make so many goals and plans - things we assume we are capable of doing in the timeframe of our chose - because we feel we’ll be as motivated as we are when we are writing the plan down. Financially, I have the habit of adding up all of my fixed expenses, adding a 30% room of variation and think I’ll save the rest. This is rational but it’s simply not reasonable. I have not once hit my goal. It’s because whenever I decide todo this - I completely discount who I am, how I feel about spending on various things and how uncertain my life is. A reasonable goal would be made by checking where i spending my variable expenses - how i feel about them - cut out the ones that don’t make me feel particularly good - and then set a savings goal. Even the act of removing unwanted expenses would involve dissecting the reason behind them, the mode of payment and ways to avoid them in the future.
Room for Error
“Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error.”
“When thinking about room for error in a forecast it is tempting to think that potential outcomes range from you being just right enough to you being very, very right.”
Guilty as charged again. I make plans like I am a bullet train in Japan - which is funny - because if there is anything consistent in my life - it is how inconsistent I am. Yet, I have an optimistic bias and I feel things will be better than they sometimes turn out to be. When that happens - I am usually caught off guard - because I never leave room for error. I have run out of petrol several times in my life. I am routinely late for my meetings and I am yet to meet my financial goals 3 months in a row. It’s not that I am not hardworking or financially savvy - it’s just because I never leave room for error. I need to get this right and this book has convinced me even more of the importance of this correction.
I really loved reading the book. It’s not all revelations - some of it is pretty mundane commonplace advice. But it is structured well and has examples that one usually doesn’t come across. It’s engaging. The parts that were revelations for me - seemed really useful and I feel better off haven’t read this book. I hope you give it a shot.
One final quote I leave you with
A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to exploit long-term optimism. Jesse Livermore figured this out the hard way