EP36: The Psychology of Money: Behavior, Luck, and Wealth
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Welcome to the Deep Dive. You send us your reading list and we pull out the key insights. We do the digging for you. Exactly. Today, we're jumping into Morgan Housel's The Psychology of Money. Lots of you wanted us to cover this one. And you can see why straight away. It's not your typical finance book, is it? No, not at all. It's really about how...

Well, how we think about money, our feelings, our biases. Right. The whole human side of it. Yeah. Even the chapter titles give it away. No one's crazy. Man in the car paradox. Yeah. It's intriguing. Totally. And the bits you sent us kick off with some great quotes. Napoleon, for one. Yes. Yes.

A genius is the man who can do the average thing when everyone else around him is losing his mind. Which for finance feels like it's all about staying calm, right? Doing the sensible thing when everyone else is freaking out. It's that emotional discipline.

Offer the best move isn't some brilliant complex strategy. It's just not panicking. Precisely. Avoiding those big fear-driven mistakes. And then there's the Sherlock Holmes one. The world is full of obvious things which nobody by any chance ever observes. That makes you think, doesn't it? About what we miss. What's right there in front of us, but we just don't see because of our own perspective. Our blind spots. Happens all the time.

all the time in investing, I bet, seeing risks or opportunities only in hindsight. Absolutely. So today's mission is to really get into these excerpts, look beyond the formulas and explore that messy human side of money. OK, let's start with that first chapter title. No one's crazy.

What's the core idea? Well, it's that our financial choices, even the ones that seem, you know, totally illogical to someone else. That's sensuous. Exactly. They're rooted in our own life experiences, our personal history with money. It's not always about pure rationality. Like the examples in the book, someone who lived through hyperinflation versus someone who only knows stable prices. Their gut feelings about cash would be completely different. Totally. Or Great Depression survivors compared to, say, tech workers in the 90s.

their appetite for risk in the stock market worlds apart. And the book argues our own little slice of experience. It dominates our thinking, right? Like 80 percent of our worldview comes from our own relatively short time seeing things. Yeah, it's a really powerful point. He mentions JFK not experiencing the Depression firsthand.

or Humphrey missing World War II. And how those huge generational events shape how different cohorts see the world, including the financial world. It really shows why direct experience matters so much. You can read about a crash, but feeling it

That's different. It sticks with you. And it's not just the huge stuff, is it? The book mentions research showing how the economy in your early adult years. Right, like high inflation or a big bull market. Can shape your lifelong financial habits. Even Bill Gross admitted timing played a role for him. Which brings in that element of luck.

or just circumstance, doesn't it? It's not always just skill or effort. That lottery ticket example was fascinating too. Poor households buying more tickets. On the surface, it looks irrational, odds-wise. But Housel argues maybe it's about hope.

Maybe it feels like the only shot at a drastically different life, however small the chance. It shows decisions aren't just about spreadsheets. They're about emotions, hope, perceived options, the whole picture. And we forget how new a lot of this stuff is. Modern retirement savings, 401k is what, 1978? Yeah, and student debt on this scale, index funds being mainstream, easy consumer credit. Hmm.

It's all pretty recent, historically speaking. So we're all kind of learning as we go, still figuring out this modern financial world. Which explains some of the chaos, maybe. We haven't had generations to normalize this stuff yet. So the big takeaway from No One's Crazy is empathy. Understanding where others are coming from, financially speaking. I think so. Recognizing that everyone's got their own backstory shaping their views. Less judgment, more understanding. Okay, good starting point. Let's shift to luck and risk. The book pairs them up immediately.

Two sides of the same coin. And the Bill Gates, Ken Evans story is just, wow, such a stark illustration. Tell us about it. Well, you have Gates, his school, Lakeside, getting one of the first computers in 1968. That's incredible luck. A one in a million event that set him on his path. Okay, that's the luck side. Then his friend, Kent Evans, equally brilliant, equally passionate about computers, dies in a mountaineering accident before graduation.

That's risk. Random, unavoidable, tragic risk. It really grounds the idea that these forces are massive, often invisible and hard to quantify.

Completely. We see the actions, the decisions, but we often miss the underlying currents of luck and risk. The book also mentions Cornelius Vanderbilt maybe bending some rules to get ahead. Yeah, suggesting success isn't always purely about virtue. And Benjamin Graham getting a lucky break with Daico early on. Right, showing how even investing legends had moments where chance played a big part. It

It challenges that simple story we like to tell ourselves, doesn't it? Success, hard work, plus smart choices. Failure, laziness, plus bad decisions. It's much messier than that. Luck and risk are always in the mix, but they don't fit neatly into our narratives. So the advice isn't be like Bill Gates because you can't replicate his specific lucky breaks. Exactly. Focus on broader patterns, maybe.

General principles that work over time rather than trying to copy outlier stories that had huge, unrepeatable luck elements. And be careful about judging. Less quick praise for success, less harsh criticism for failure, knowing luck and risk are involved. That seems sensible. A bit more humility about outcomes, both our own and others. The chapter wraps up saying you have to play the game, though. You need to be in it for luck to even have a chance to find you. Right. You can't win if you don't play.

Participate, manage the risks, but be in the arena. Okay, let's talk about never enough. This one starts with that amazing anecdote. Kurt Vonnegut and Joseph Heller at a party. Yeah, hosted by some billionaire hedge fund manager on Shelter Island. Vonnegut points that the billionaire made more money in a single day than Heller ever made from Catch-22. Ouch. But Heller's reply? Heller says, yes, but I have something he will never have. Vonnegut asks what? Heller says, enough. Wow.

That hits hard. The difference between wealth and contentment. Absolutely. And the book uses cautionary tales to drive it home. Rajat Gupta? Former McKinsey CEO, right, had something like $100 million. Yep. And still risked it all, ended up in prison for insider trading. Why?

He wanted more. He couldn't define enough. And Bernie Madoff, he had a successful legitimate business for years. But it wasn't enough. So he built a massive Ponzi scheme. Insatiable greed. It wasn't just criminals either. Long-term capital management.

Nobel Prize winners on their board. Immense wealth, immense brainpower. And they blew up spectacularly. Why? They took insane risks to make even more money they didn't need. Buffett's quote on LTCM is brutal but true. To make money they didn't have and didn't need, they risked what they did have and did need.

And that's foolish. Pure Buffett. So what are the principles for finding enough? The book mentions a few. Key things are stop the goalposts moving constantly. Don't get sucked into endless social comparison keeping up with the Joneses. Recognize that chasing more can actually lead to regret, not happiness. And crucially, know what's never worth risking for more money.

Your reputation, your freedom, your family, your friends, your happiness. Sounds simple but incredibly hard in practice, I imagine. Defining your own enough. It's a continuous process, I think. But a vital one for actual well-being. All right, let's shift gears to confounding compounding. The Ice Age analogy here was...

unexpected. It really was, but it works so well. The point isn't just about super cold winters making ice ages. It's the summers, right? The ones that aren't quite warm enough to melt the previous winter snow. Exactly. Small amounts of ice surviving each year, building up slowly, consistently over thousands of years until you have these massive ice sheets. It's not traumatic. It's persistent. Like compounding and finance.

Small, consistent gains over a very long time leading to huge results. Not necessarily flashy, quick wins. Precisely. And that ties into the Warren Buffett example again. His genius isn't just high returns. It's the timescale. He's been doing it for so long. Decades and decades. The book points out something like 99.9% of his net worth came after age 50. Think about that. It's all back end loaded. That really puts the focus on patience, doesn't it?

Time is the magic ingredient. Hugely. Compare him to Jim Simons at Renaissance Technologies. Simons had way higher annual returns, like 66 percent versus Buffett's 22 percent maybe. But Buffett's overall wealth is larger. Significantly. Because Buffett started much earlier and has been compounding for much, much longer.

Time trumped even those incredible returns. The book uses hard drive capacity as another example, that exponential growth over decades. Yeah, how it seems slow at first then suddenly explodes. Compounding is nonlinear, and we humans are bad at intuitively grasping exponential growth. So the lesson is consistency over a long time beats trying to hit home runs constantly. Pretty much. House of Jokes of the book could have been titled Shut Up and Wait. Yeah.

A bit blunt, but captures the essence. Discipline and patience are key. Okay, now this distinction. Getting wealthy versus staying wealthy. This feels important. It really is. Housel argues they require different skills, sometimes even opposing mindsets. He uses Jesse Livermore, the legendary trader. Made fortunes, lost fortunes, multiple times. Huge win in the 1929 crash, even. But couldn't hold onto it. Ended tragically. He was brilliant at getting wealthy, taking big risks.

But not staying wealthy. Exactly. Contrast him with Abraham Dramansky, a real estate guy also wiped out in 1929. Both mastered the getting part but failed the staying part. So what's the difference in skills? Getting wealthy often takes risk.

Optimism, maybe being aggressive, staying wealthy. That needs humility, frugality. A bit of fear even. Paranoia. Housel uses that word, acknowledging that gains are fragile, that things can go wrong. Avoiding ruin becomes paramount. He quotes Michael Moritz from Sequoia Capital. We've always been afraid of going out of business, even at the top. That's the survival mindset. It keeps you from taking existential risks. And again, with Buffett, his success is partly about what he didn't do. Right.

Didn't use tons of debt, didn't panic selling crashes, didn't deviate from his core principles. He avoided the fatal mistakes. There's that story about Rick Guerin, too, another early Buffett partner. Just as smart. But he got overleveraged.

When the market dipped hard in the 70s, he was forced to sell his Berkshire shares back to Buffett at low prices. Ouch. He could get wealthy, but the leverage meant he couldn't stay wealthy through the downturn. A perfect painful example. So the foundation of long-term success is survival, weathering the storms. Which means building resilience, having buffers, not being fragile. Exactly. Staying in the game is everything. Okay, let's talk...

Tales you win. This is about rare extreme events having an outsized impact. Precisely. The tales of the distribution curve, the really big wins or losses. The book uses the example of art collector Heinz Bergeron. What about his collection? He owned thousands of pieces by Picasso, Matisse, Klee, etc. But the vast majority of the collection's value, maybe 99%, came from a tiny fraction of those works.

A few masterpieces drove almost all the return. The tail events, the huge winners. Yeah. And Housel says it's similar in venture capital. Most startups fail or do OK. But a few become Google or Facebook and pay for all the losses and then some. Right. Same with public stocks.

Most don't drive the market's long-term return. It's a small number of huge winners over time, your Amazons, your Apples. He mentions Disney too, right? Struggling early on? Yeah, apparently close to bankruptcy before Snow White. That one film, that massive tail event success transformed everything. So how does this apply to us, regular investors? It emphasizes staying invested.

You need to be in the market to capture those occasional huge upswings, those positive tail events. If you jump in and out, you risk missing the days or years that make the biggest difference. And maybe being okay with most individual investments not being home runs. Exactly. Your portfolio's overall success might be driven by just a few big winners over time. You don't need every pick to be amazing.

Amazon's philosophy is mentioned too, tolerating failures like the Fire Phone. Because they're constantly searching for the next AWS, the next massive tailwind that dwarfs the failures. So don't get discouraged by the inevitable duds or small wins. Keep playing the long game. That seems to be the message. Failure is part of the process. Persistence increases your odds of eventually capturing a beneficial tail event. Interesting. Okay, next. You and me and the man in the car paradox.

What's this about? This comes from Housel's time working as a valet at a fancy hotel in L.A. He'd park these amazing, expensive cars, Ferraris, Lamborghinis. And he noticed something. He noticed that when people saw someone driving a supercar, they rarely thought, wow, that driver's cool. Instead, they thought, wow, if I had that car, people would think I'm cool. Exactly. The admiration or envy is directed at the car and the observer imagines themselves in it.

The driver is almost irrelevant. Huh, that's painfully accurate. So people buy fancy stuff seeking respect and admiration. But what they often get is just attention focused on the stuff, not genuine respect for them as a person. The paradox. He shares a letter he wrote to his son about this. Yeah, basically saying no one is as impressed with your possessions as you are.

True respect comes from things like humility, kindness, empathy. Not your watch or your car. So while nice things are nice, they might not buy you the deeper thing you're actually seeking. Especially not from the people whose respect you really value. They'll care more about how you treat them. A good reminder. Okay, let's unpack wealth, what you don't see. This connects nicely. It does. The core idea. True wealth is hidden.

What we typically see is richness, which is different. How so? He tells a story about seeing a guy in L.A. driving a Porsche looking rich.

Later, he learned the guy was struggling financially. The Porsche was leased. Appearances were deceiving. So seeing someone spend a lot doesn't mean they have a lot. Exactly. Seeing someone with a $100,000 car only tells you they have $100,000 less than they did before or $100,000 more debt. It tells you nothing about their actual net worth. So wealth isn't the spending. Wealth is. The assets you haven't spent?

The money working for you unspent. It's the income not consumed. That's what provides options, flexibility, independence. The Rihanna anecdote is funny but makes the point. Nearly bankrupt despite huge earnings. And her advisor basically telling her, you spend money like it's going out of style.

Spending equals feeling rich, maybe, but it depletes actual wealth. Bill Mann's quote is good, too. The difference between feeling rich and being rich. Right. Feeling rich is spending. Being rich is often about not spending money you don't have or even not spending all the money you do have. It's about building that hidden reserve. So rich is often visible income, flashy spending. Yeah.

Wealthy is often invisible, unspent assets providing security. A crucial distinction. Wealth buys freedom. Richness just buys stuff. The diet analogy helps too. Exercise is visible, like being rich.

Wealth is the disciplined net calorie burn unseen but impactful. Yeah, it's the long-term discipline versus the short-term display. And it's harder to learn how to be wealthy because it's hidden, right? We see the rich spenders but the quiet accumulators like Ronald Reed, the janitor millionaire. They're invisible until the very end, if ever.

So the role models we see often teach us how to be rich, not necessarily how to be wealthy. Makes sense. Okay, let's talk about save money. Seems obvious, but the chapter argues it's maybe the most important factor. Often more controllable and impactful than income or investment returns, yes. It sounds basic.

but its power is underestimated. Why is saving more controllable? Well, boosting your income significantly often depends on external factors. Getting spectacular investment returns involves risk and uncertainty. But controlling your spending, that's largely up to you. He uses that 1970s oil analogy, people feared running out of oil. And the biggest impact came not from discovering massive new oil fields,

but from becoming vastly more energy efficient using less. Like controlling your spending saving is more like efficiency improvement, a direct lever you can pull. Exactly. You have more direct control over your savings rate than over market returns or your salary next year. The hypothetical scenario shows this clearly two people, same starting point, but one saves way more. And ends up wealthier even with lower investment returns than the person who saved less but invested more aggressively.

The savings rate was the bigger driver. And saving isn't just about the money itself. It's buying. What? Freedom. Options. Flexibility. Control over your time. A buffer against shocks.

It's less about deprivation, more about gaining autonomy. But increasing savings often means wanting less stuff, letting go of ego, spending to impress. That's a big part of it. Reducing the need for conspicuous consumption frees up huge amounts to save and invest for your future self. And the advice to save even without a specific goal.

Just save. Yeah, because life is unpredictable. Having savings provides a cushion, allows you to weather storms or seize opportunities you couldn't otherwise, save for the surprises you know are coming, even if you don't know what they are. So start small, focus on what you control spending, ego. Exactly. Build the habit.

Okay, next chapter, reasonable rational. This sounds intriguing. Being reasonable is better than being rational with money. That's the core idea. Pure, cold rationality often doesn't work long term because we're emotional creatures. Being reasonable means finding strategies that are good enough and that you can actually stick with emotionally.

So maybe not the absolute mathematically optimal strategy, but one you won't abandon when things get scary. Precisely. The book uses the weird historical example of fever therapy for syphilis. Fever therapy. Yeah. Inducing fever seemed to help some patients before antibiotics. It was based on observation, seemed irrational, but had some effect.

But even knowing that, people hate fevers because they feel bad. Ah, so like financial strategies. Something might be rational on paper, but if it makes you constantly anxious or likely to panic sell... It's not reasonable for you. It won't work in practice. Harry Markowitz, the Nobel Prize winner for portfolio theory. His own allocation. He personally just did 50-50 socks and bonds. Not because it was calculated to be perfectly optimal, but because he knew it would minimize his future regret.

That was reasonable for him. That's fascinating. What about the advice to young savers in 2008 to use leverage? Rationally, maybe it made sense on paper. But totally unreasonable in practice. Imagine telling a young person to borrow heavily to buy stocks during a massive crash.

psychologically terrifying, and likely to lead to bailing at the worst possible time. So it's okay to make choices that aren't perfectly optimal if they help you stay the course. Like investing in companies you love, even if they aren't perfect. Housel argues yes. Or maybe having a slight home bias in your investments. If these imperfect but reasonable choices help you sleep at night and stick to your long-term plan, they're better than a perfect plan you abandon.

Even Jack Bogle investing in his son's high fee fund for family reasons fits this. Yeah. Another example where personal factors made a suboptimal choice reasonable for him. Life and relationships matter too. So consistency with a reasonable plan trumps chasing a perfect but unsustainable one. That's the key takeaway. Sustainability over theoretical perfection. OK, next up. Surprise. Scott Sagan's quote sets the tone. Things that have never happened before happen all the time. A great quote for investing.

It highlights the inherent unpredictability. The past is not always prologue, especially in finance. The chapter warns against the historians as profits fallacy, right? Relying too much on past events to predict the future. Exactly. Especially in finance, which

which is driven by human emotions and constantly changing structures, unlike, say, geology where past patterns are more stable. The Feynman quote about electrons not having feelings? Perfectly captures it. Markets have feelings. Well, the people in them do, and that changes everything. Bill Bonner's image of the market as a chaotic capitalism at work guy smashing things up. Vividly portrays that constant change and disruption. It's not a static system. And major events, the depression, WWII, 9/11, the 2008 crisis,

They were unprecedented by definition. So using past worst cases might not capture future worst cases. Right. The next big crisis probably won't look exactly like the last one. The conditions change. Kahneman's point is key. The lesson from surprises isn't how to predict the next one. It's that the world is fundamentally unpredictable. We need to build systems that acknowledge that. And the financial world itself has changed so much recently. 401k, VC,

Tech dominance, index funds, accounting rules. Exactly. Rules or correlations from 30, 40 years ago might just not apply anymore. Even Benjamin Graham changed his views significantly over his career. So learn from history about behavior, but be wary of assuming specific trends or relationships will hold forever. That's a good summary.

Understand psychology, but expect the unexpected in terms of market structure and events. Which leads nicely into room to breathe or margin of safety. The blackjack analogy is great here. Yeah, the card counters and bringing down the house. They knew the odds were slightly in their favor. But they never bet everything on one hand. They always kept reserves, room for error, because even favorable odds don't guarantee winning any single hand. Precisely. You need that buffer to survive the inevitable fluctuations and stay in the game.

Kevin Lewis exemplified this. Applied to investing, it means planning for returns to be lower than average, building in pessimism. Or realism, acknowledging that forecasts are often wrong and building in a cushion so you're OK even if things don't go perfectly to plan. It's a margin of safety. The book talks about optimism bias. We tend to underestimate risks, like people taking on huge leverage in real estate, assuming prices only go up. And it advocates a barbelled approach

Maybe take some calculated risks, but balance it with a significant amount of safety like cash or bonds. Don't put all your eggs in the high risk basket. And then there are the unknown unknowns things you can't even imagine going wrong, like mice chewing tank wires in WWII. Right.

You can't plan for everything, so you need general resilience. Avoid single points of failure relying only on your job or only on one investment type. So planning for things to go wrong isn't pessimism, it's just smart preparation, building in that buffer. Exactly. It's the financial equivalent of having fire extinguishers and insurance.

You hope you don't need them, but you're prepared if you do. Okay, let's talk about you'll change. This is about the end of history illusion. Yeah, that psychological quirk where we tend to think our current selves, our values, desires, goals are the final version. We underestimate how much will change in the future. Like the story of the guy who finally becomes a doctor, his lifelong dream. Only to find out he doesn't actually enjoy the reality of it.

The person who achieved the goal wasn't the same person who said it years earlier. We see it all the time. Childhood dreams change. Teenage ambitions shift. Adult priorities evolve. The low number of grads working in their major field. It all points to the fact that long-term plans made by a past version of you might not fit the future version.

Which creates a challenge for long-term investing, right? Charlie Munger's rule, never interrupt compounding unnecessarily. But what if your life goals change dramatically? Maybe interrupting it becomes necessary, or at least very tempting. Sticking to a decade-long plan is hard when you change. So the advice is, balance. Avoid extreme paths early on that lock you in too much. That seems wise.

Don't make financial or career choices so extreme that you'll deeply regret them if your future self has different priorities. Keep some flexibility. Jason Zweig's story about Kahneman and sunk costs is relevant here, too. Yeah, Kahneman's ability to just walk away from things that weren't working, regardless of past investment of time or money.

No sunk costs. Be willing to change course. So plan long term, but stay adaptable. Expect to change. A tricky but necessary balance. All right. Everything has a price.

The idea here is that success, achievements, they all come with hidden costs. Often non-obvious costs. Yeah. Things you only realize later. The GE example is used again, the immense pressure on CEO Jeff Immelt after Jack Welch. And Immelt's quote, every job looks easy when you're not the one doing it. The hidden difficulties, the stress, the tradeoffs. That's the price of leadership in his case.

For investing, the book argues the price of good long-term stock returns isn't just the money invested. It's the volatility, the fear, the doubt, the uncertainty you have to endure along the way. Exactly. That's the cost of admission for potential rewards.

If you want the gains, you have to be willing to pay the price of enduring the downturns. And trying to avoid that price, like trying to time the market perfectly to miss all the drops? Often leads to worse results. Those tactical funds underperforming simple portfolios during volatile times show that. Trying to get the reward without paying the price often means you get neither. GE smoothing earnings under Welch, another hidden price paid later. Arguably, yes. The short-term benefit came with a long-term cost.

when reality caught up. So the key is reframing volatility. See it as a fee for potential returns, not a fine for being invested. That's a great way to put it. Accept it as part of the deal. The expected cost

and you're less likely to panic when it inevitably shows up. Okay, let's tackle when things get crazy, talking about bubbles. It argues bubbles aren't just pure greed. Right. It's more nuanced. People inside a bubble often make decisions that seem rational to them at the time based on the information and social cues they're getting. Even if that information is flawed or incomplete? Yes. And learning from bubbles is hard because people disagree on the causes, and nobody likes admitting they held on to something ridiculously overpriced.

The key idea introduced here is how bubbles form, partly because investors with different goals and time horizons influence each other. This is crucial. You have short term traders focused on momentum and long term investors focused on fundamentals. Yeah. But during a bubble. The lines blur. Yeah. The short term traders are making money. Their actions seem validated. This momentum can then suck in long term investors who start thinking,

Maybe this time is different, even when valuations look crazy by historical standards. Like the Google stock example. A day trader and a long-term investor value it differently. Or the dot-com bubble, where short-term hype pulled in long-term money. Exactly. Or the housing bubble, where short-term flipping became the main game for many, ignoring long-term affordability or rental yields.

The short-term perspective dominated. Cisco's stock price in 1999 is used as an example too, valued at something insane. Implying impossibly high future growth.

That price only made sense for short-term momentum traders, but long-term investors got caught up in it too. So the advice is know your own game, understand your time horizon, your strategy. And don't get swayed by the actions of people playing a completely different game with different rules and goals. Stick to your own strategy. Makes sense. Let's talk about the seduction of pessimism. Why does bad news seem more appealing or smarter? Deirdre McCloskey's quote points to our fascination with negative stories.

Housel argues pessimism often sounds more intelligent because progress is slow while setbacks are sudden and dramatic. Optimism can sound naive, like you're ignoring risks. Exactly. Predicting doom sounds serious and intellectual. Predicting improvement sounds like wishful thinking. The contrast between that Russian analyst predicting the U.S. collapse... Igor Panarin, yeah. Got tons of press, but...

It was totally wrong. Versus the quiet, steady, but less newsworthy success story of Japan's post-war recovery. It shows the bias perfectly. Bad news travels fast and gets attention. Good news, especially gradual good news, often doesn't. Matt Ridley and Hans Rosling make similar points, predicting doom is rewarded. And we think the world is scarier than it is. There are evolutionary reasons our brains are wired for threat detection. And

And financial news amplifies it. Recessions hit everyone. So bad economic news feels very personal and urgent. Pessimists also tend to extrapolate current bad trends indefinitely without factoring in adaptation or innovation. Yes, like the peak oil predictions that didn't foresee fracking.

Markets adapt. People find solutions. Linear extrapolation of negative trends is often wrong. And progress is usually slow, cumulative like airplanes evolving or heart disease deaths falling dramatically over decades. While setbacks crash as wars are fast and grab headlines. It skews our perception. Progress is quiet. Setbacks are loud. So while pessimism is tempting,

optimism grounded in the reality of adaptation and problem solving is often more accurate long term. That seems to be Housel's view. Problems get solved, systems adapt. It's not blind optimism, but recognizing the power of progress over time. Stephen Hawking's quote about lowered expectations is interesting too. Right, finding contentment in progress, however slow. Okay, nearly there.

When you believe everything, this starts with that alien thought experiment. Observing the U.S. economy in 2007 versus 2009.

The physical stuff, buildings, factories, people skills, didn't drastically change in two years. But the story people told themselves about the economy completely changed. Confidence collapsed. And that change in narrative, that story, had massive real-world financial consequences. It shows stories are the fuel of the economy. The book talks about appealing fictions, things we believe because we want them to be true. Like the centenarian believing she lived so long because she was born on Armistice Day.

or the folk remedy believed despite lack of evidence. We cling to stories that offer hope or meaning. And in finance, this explains why people follow flawed advice. TV stock pickers, high-fee funds with bad track records. The allure of a life-changing outcome, however unlikely, is powerful.

We're drawn to stories that promise shortcuts or huge wins, even if the odds are terrible. We're bad at judging low probabilities, making us vulnerable to overly optimistic stories, like Madoff's promise of steady high returns. Exactly. That gap between what we want to be true, easy, guaranteed high returns, and what we need to be true, realistic returns with risk, makes us susceptible.

Which again, highlights the need for: room for error, margin of safety, protection against being wrong about the story we believe. Precisely. Even the Fed underestimated the 2008 crisis, maybe partly due to preferring optimistic narratives. And our own beliefs filter how we see data. We find evidence confirming what we already think. The author's story about his toddler making up a completely wrong but coherent story about his job illustrates it perfectly. We fill the gaps in our understanding with narratives, often flawed ones.

So acknowledge complexity, uncertainty, the limits of our knowledge, and the power of narratives, both good and bad. A good summary of a complex chapter. Beware the stories you tell yourself about money. Okay, let's wrap up with confessions and the final bits.

Confessions frames itself as pulling lessons together. Yeah, using that old story about the dentist in 1931 pulling teeth without real consent. As a metaphor for how financial advice used to be, maybe. Now, like medicine, it should be more about informed choices personalized to the individual. Right, which leads to the point that Housel can't give specific advice because he doesn't know your situation. But he offers general principles distilled from the book. Things like... Humility about luck and risk. Less ego. More wealth.

Investing for sleep at night, quality, time is your ally, accepting you'll be wrong sometimes. Using money to buy control over time, kindness over possessions for respect, saving without needing a reason, uncertainty as the price of admission. Room for error, avoiding extremes, liking risk but fearing ruin.

Knowing your own game. Accepting there's no single right answer. It's a great summary list of the behavioral side. Apply universal principles to your unique life. That's the essence. Then, What's Never Happened talks about aligning actions with beliefs. Using Sandy Gotsman's question, what you own and why. Yeah. Does your portfolio actually reflect...

your stated philosophy. He mentions the gap between advice and behavior. Again, fund managers not owning their funds, doctors choosing less aggressive end-of-life care. It reiterates that there's no single right way, just what works for you. And Housel shares his own goal. Independence. Control over time. Influenced by his dad retiring early,

And achieving it often means managing expectations, living below your means. He shares his own reasonable, over-rational choices, paying off the mortgage early, holding more cash for peace of mind. And his shift to simple, low-cost index funds for consistency. It's his personal application of the book's principles.

Ending with that core message again, master the psychology, find what works for you. No one's crazy. A fitting personal conclusion. Then there's the brief history lesson framing the last 75 years. Waking up in 2020 after sleeping since 1945. The sheer amount of change.

post-war uncertainty, then the boom fueled by the GI Bill, consumer credit pent up demand. A period of more shared prosperity than the shifts in the 70s inflation competition. Followed by widening inequality from the 80s onward, stagnant middle class incomes, rising debt to maintain lifestyles. Leading to the 2000s debt bubble, the 2008 crash, and the slow recovery connecting to current frustrations.

The key theme being the slow, painful adjustment of expectations to changing economic realities, a recurring pattern.

And finally, you're not normal. A last reminder of our biases. We're not the rational actors of economic theory. We underestimate risk compared to Buffett or Gates. We prefer false certainty over acknowledged uncertainty. We consistently undershoot our need for room for error. We're plagued by social comparison. We struggle to learn from the past. We focus on bad news over slow progress. All these inherent biases.

The suggestion is maybe acknowledging them, building in more buffers, focusing on steady progress. That might be the path to better outcomes. Wow. Okay. That was a comprehensive tour. We've covered behavior, luck, risk, enoughness, compounding, staying wealthy, tails.

It really drills down into the idea that managing money is less about what you know and more about how you behave. So our aim was to give you that shortcut, pulling out the core insights from Housel's work that you sent us. Hopefully some useful perspectives there. We hope it sparks some reflection on your own experiences and how your psychology might be playing a role in your financial life. Absolutely. So the final thought to leave you with, of all these ideas, biases, concepts like a

enough or room for error, which one really hit home for you? Which one resonates most with your own financial journey? And maybe, just maybe, what's one small thing you might think about doing differently after this deep dive? Something to ponder. Thanks for sharing the sources and joining us. Yes, thank you for tuning in. And thanks for being part of the deep dive. We'll see you next time.