The Psychology of Money

• Insight: Our view of how money works can be anchored to our life experiences or place in history.
• Insight: Investment decisions are anchored to personal experiences.
• Insight: The Sunk Cost Fallacy (anchoring decisions to past efforts or spending that has no relevance to the future) is particularly damaging, as people change over time.
• Insight: "an anchor of psychology is not realizing that rational people can see the world through a different lens than your own."

"If you remove just a few of Berkshire’s top investments, its long-term track record is pretty average."

- Charlie Munger

Insight: Returns tend to come from a small proportion of investments.

"The best way to achieve felicity is to aim low."

- Charlie Munger

Insight: Happiness can be derived from lowering expectations.

Principle: Use a room for error when estimating future returns.

Principle: Estimate with a wide margin of safety.

"I did not intend to get rich. I just wanted to get independent."

- Charlie Munger

Insight: Money is a tool to buy pieces of your future time.

"The first rule of compounding is to never interrupt it unnecessarily."

- Charlie Munger

Insight: Time is the exponent of interest in compounding.

• Insight: We have a need to believe that we are more in control than we are.
• Insight: The illusion of control is more persuasive than the reality of uncertainty.

• Definition: An attachment to favourable odds, even when the downside is unacceptable.
• Example: Russian roulette - the odds are in your favour, the the downside is not worth any potential upside.
• Insight: Excessive leverage - taking on debt to make money go further - can produce ruin.
• Reference: Nassim Taleb: "You can be risk loving and yet completely averse to ruin."
• Principle: Take risk, but never enough that is enough to wipe you out.