The Psychology of Money - A Blog Post

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alpenglow
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The Psychology of Money - A Blog Post

Post by alpenglow » Thu Jun 07, 2018 10:58 am

I just came across this blog post and thought it might be of interest here.

http://www.collaborativefund.com/blog/t ... -of-money/

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Re: The Psychology of Money - A Blog Post

Post by livesoft » Thu Jun 07, 2018 11:29 am

Let me make this a less naked link. Here is a quote from the article by Morgan Housel.
That’s because investing is not the study of finance. It’s the study of how people behave with money. And behavior is hard to teach, even to really smart people.
The article goes on to comment about 20 causes of bad behavior which are not necessarily the usual behavioral finance traps.
This report describes 20 flaws, biases, and causes of bad behavior I’ve seen pop up often when people deal with money.
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Re: The Psychology of Money - A Blog Post

Post by nisiprius » Thu Jun 07, 2018 11:35 am

It is sensational. I've only skimmed it, I need to sit down and read it from start to finish. It is replete with wisdom. A few of the main points:
Morgan Housel wrote: 1. Earned success and deserved failure fallacy: A tendency to underestimate the role of luck and risk, and a failure to recognize that luck and risk are different sides of the same coin....

2... Say you want a new car. It costs $30,000. You have a few options: 1) Pay $30,000 for it. 2) Buy a used one for less than $30,000. 3) Or steal it. 99% of people avoid the third option, because the consequences of stealing a car outweigh the upside.

But say you want to earn a 10% annual return over the next 50 years. Does this reward come free? Of course not. Why would the world give you something amazing for free? Like the car, there’s a price that has to be paid.

The price, in this case, is volatility and uncertainty. And like the car, you have a few options: You can pay it, accepting volatility and uncertainty. You can find an asset with less uncertainty and a lower payoff, the equivalent of a used car. Or you can attempt the equivalent of grand theft auto: Take the return while trying to avoid the volatility that comes along with it.

Many people in this case choose the third option. Like a car thief – though well-meaning and law-abiding – they form tricks and strategies to get the return without paying the price. Trades. Rotations. Hedges. Arbitrages. Leverage.
This is a big one, and I've never heard it said before, yet it's obvious:
When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.

The paradox of wealth is that people tend to want it to signal to others that they should be liked and admired. But in reality those other people bypass admiring you...
And a few others. Actually, it could be worth starting twenty separate threads, one for each of his points.
5. ...Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works.
9. Attachment to social proof in a field that demands contrarian thinking to achieve above-average results.
That's why Bogleheads works: we are attached to social proof and it doesn't hurt us because we have renounced trying to achieve above-average results.
12. A tendency toward action in a field where the first rule of compounding is to never interrupt it unnecessarily.
14. A tendency to be influenced by the actions of other people who are playing a different financial game than you are.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: The Psychology of Money - A Blog Post

Post by Fallible » Thu Jun 07, 2018 11:39 am

This is an excellent blog by Morgan Housel on how investing is not the study of finance, but the study of how people behave with money. "And behavior," he writes, "is hard to teach, even to really smart people."

His points, including a graphic on the "Hierarchy of Investor Needs,'" are referenced in a current blog by Rick Ferri on simplicity vs. complexity:
viewtopic.php?f=10&t=250534&start=100
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Re: The Psychology of Money - A Blog Post

Post by alpenglow » Thu Jun 07, 2018 11:54 am

Thanks livesoft. I'm a teacher and my free period was just ending.

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Re: The Psychology of Money - A Blog Post

Post by alpine_boglehead » Thu Jun 07, 2018 12:10 pm

It's a real gem - thanks for posting.
The idea is that you have to take risk to get ahead, but no risk that could wipe you out is ever worth taking.

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Re: The Psychology of Money - A Blog Post

Post by livesoft » Thu Jun 07, 2018 12:17 pm

nisiprius wrote:
Thu Jun 07, 2018 11:35 am
[...]
And a few others. Actually, it could be worth starting twenty separate threads, one for each of his points.
An internet search suggests that Mr Housel may have written 20 separate blog articles on each of these over the years and this report just puts them all together in shortened form. Or maybe he was putting together an outline for a book.

Anyways, it is to our benefit.
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Re: The Psychology of Money - A Blog Post

Post by kaeltor » Thu Jun 07, 2018 12:33 pm

livesoft wrote:
Thu Jun 07, 2018 11:29 am
Let me make this a less naked link. Here is a quote from the article by Morgan Housel.
That’s because investing is not the study of finance. It’s the study of how people behave with money. And behavior is hard to teach, even to really smart people.
The article goes on to comment about 20 causes of bad behavior which are not necessarily the usual behavioral finance traps.
This report describes 20 flaws, biases, and causes of bad behavior I’ve seen pop up often when people deal with money.
I wonder if that's why Ray Dalio's principles have worked so well for him, they are principles for behavior

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Re: The Psychology of Money - A Blog Post

Post by unclescrooge » Thu Jun 07, 2018 4:39 pm

alpenglow wrote:
Thu Jun 07, 2018 10:58 am
I just came across this blog post and thought it might be of interest here.

http://www.collaborativefund.com/blog/t ... -of-money/
Fantastic. Thanks for sharing.

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Re: The Psychology of Money - A Blog Post

Post by le_sacre » Thu Jun 07, 2018 4:57 pm

That was great! And on many levels; for instance, I found it to be a good example of persuasive writing technique as well.

And the pyramid (which he earlier described here: https://www.fool.com/investing/general/ ... needs.aspx) gave me sort of an Aha moment. Maybe not for the primary lesson it intends (don't bother with any steps further up the pyramid until you've mastered each one below), but rather as a reminder that mastering the top level (taxes in his pyramid) isn't nearly as important as those more fundamental levels below.

I don't have a great instinctive acumen for finance, and sometimes I start to stress out about tax-efficient placement of my assets or how I have yet to figure out the whole tax-loss-harvesting thing. It's nice to be reminded that these concerns (while worthwhile) are not worth feeling stress about if you've got your fundamentals in place. Better to allocate that mental stress to income, budget, and savings rate!

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Re: The Psychology of Money - A Blog Post

Post by delamer » Thu Jun 07, 2018 6:29 pm

Very thoughtful and observant article.

This section about reacting to the market struck me particularly:

“What you don’t realize is that the traders moving the marginal price are playing a totally different game than you are. And if you start taking cues from people playing a different game than you are, you are bound to be fooled and eventually become lost, since different games have different rules and different goals.

Personal finance is deeply personal, and one of the hardest parts is learning from others while realizing that their goals and actions might be miles removed from what’s relevant to your own life.”

Also loved the comment from Rihanna’s financial advisor after she sued him...

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Re: The Psychology of Money - A Blog Post

Post by David Jay » Thu Jun 07, 2018 7:34 pm

That article has a great "Hierarchy of Investor Needs" pyramid.
Image
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Re: The Psychology of Money - A Blog Post

Post by livesoft » Thu Jun 07, 2018 7:45 pm

That hierarchy actually is flawed when it comes to Boglehead principles. I think many people reading this forum conflate Asset Allocation and Security Selection, so there doesn't need to be two trapezoids describing them.

After all, security selection is practically trivial: Pick the index fund that matches the asset class in your asset allocation. US stocks? Pick Total US Stock Market. Bonds? Pick Total US Bond Index. Small-caps? Pick Small-cap Index.
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Re: The Psychology of Money - A Blog Post

Post by David Jay » Thu Jun 07, 2018 8:13 pm

livesoft wrote:
Thu Jun 07, 2018 7:45 pm
That hierarchy actually is flawed when it comes to Boglehead principles. I think many people reading this forum conflate Asset Allocation and Security Selection, so there doesn't need to be two trapezoids describing them.

After all, security selection is practically trivial: Pick the index fund that matches the asset class in your asset allocation. US stocks? Pick Total US Stock Market. Bonds? Pick Total US Bond Index. Small-caps? Pick Small-cap Index.
I think your comments are on track without the pyramid being flawed. Asset Allocation is WAAAY more important, based on need, willingness and ability to take risk. It will make the difference between staying the course or caving.

As you say, security selection (including tilts) is practically trivial.

Think of the width of the layer as the relative importance to a successful outcome. Nothing is more important than investor behavior: LBYM, save diligently, etc. The stuff at the top is (relatively) piddly. I doubt that anybody ended up eating cat food because they used Total World instead of Total US. Or for failing to make enough Roth conversions before the start of Social Security.
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Re: The Psychology of Money - A Blog Post

Post by Fallible » Thu Jun 07, 2018 8:54 pm

David Jay wrote:
Thu Jun 07, 2018 8:13 pm
livesoft wrote:
Thu Jun 07, 2018 7:45 pm
That hierarchy actually is flawed when it comes to Boglehead principles. I think many people reading this forum conflate Asset Allocation and Security Selection, so there doesn't need to be two trapezoids describing them.

After all, security selection is practically trivial: Pick the index fund that matches the asset class in your asset allocation. US stocks? Pick Total US Stock Market. Bonds? Pick Total US Bond Index. Small-caps? Pick Small-cap Index.
I think your comments are on track without the pyramid being flawed. Asset Allocation is WAAAY more important, based on need, willingness and ability to take risk. It will make the difference between staying the course or caving.

As you say, security selection (including tilts) is practically trivial.

Think of the width of the layer as the relative importance to a successful outcome. Nothing is more important than investor behavior: LBYM, save diligently, etc. The stuff at the top is (relatively) piddly. I doubt that anybody ended up eating cat food because they used Total World instead of Total US. Or for failing to make enough Roth conversions before the start of Social Security.
Housel offers a bit more explanation for the pyramid in his "Motley Fool" blog
(which is posted earlier here) vs. the more recent blog, but still not a lot of detail:

"A common problem for any investor to stumble on is the temptation to solve one problem without first mastering a more fundamental one. It can drive you crazy, because if you've gotten the hang of an advanced topic, you might think that you're on the road to success, but something more basic like investor behavior or asset allocation could still put you on a road to ruin."

I read it this way: If the right investor behavior is understood (e.g., the importance of knowing oneself, one's risk aversion, tendency to be overconfident, and other behavioral pitfalls), one can go on to learning about asset allocation (what it is, what it involves - need, ability, willingness to take risk, etc.), and then on to learning about fees/costs, and then, armed with the basics, go on to security selection, then taxes. Obviously, there's going to be some overlap, especially with fees and security selection, but you get the idea.
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Re: The Psychology of Money - A Blog Post

Post by Independent George » Thu Jun 07, 2018 10:02 pm

I think the pyramid matches the Boglehead philosophy pretty well.

Reading these forums, we discuss security selection all the time: S&P500 vs Total Market Index? Treasuries or CDs? How much international? How much to tilt in factors?

The consensus answer in all of these same threads: It really doesn't matter much as long as you stick to your investment plan/AA. Keep calm and carry on.

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Re: The Psychology of Money - A Blog Post

Post by livesoft » Fri Jun 08, 2018 5:19 am

Ah, yes, I see what everyone is saying about the pyramid.

I also saw a couple of posters asking how to invest inheritances today where psychology may be important. Can the pyramid be helpful to them?

viewtopic.php?p=3963140#p3963140 Lots of stocks to dispose of, but some respondents would want to analyze the stocks and maybe keep them

viewtopic.php?p=3963127#p3963127 Doesn't want to lose principal
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Re: The Psychology of Money - A Blog Post

Post by Grt2bOutdoors » Fri Jun 08, 2018 6:32 am

Bookmark- this is a great write up by Morgan.
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Re: The Psychology of Money - A Blog Post

Post by Grt2bOutdoors » Fri Jun 08, 2018 6:35 am

livesoft wrote:
Thu Jun 07, 2018 7:45 pm
That hierarchy actually is flawed when it comes to Boglehead principles. I think many people reading this forum conflate Asset Allocation and Security Selection, so there doesn't need to be two trapezoids describing them.

After all, security selection is practically trivial: Pick the index fund that matches the asset class in your asset allocation. US stocks? Pick Total US Stock Market. Bonds? Pick Total US Bond Index. Small-caps? Pick Small-cap Index.
I agree with what you are saying. Security selection is for those who having a speculative slice in their portfolio where they hold individual lottery tickets. I hold a few myself but for vast majority of holdings am indexed.
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Re: The Psychology of Money - A Blog Post

Post by IlliniDave » Fri Jun 08, 2018 6:49 am

This is really good. I think his pyramid is spot on and I've never seen it laid out so clearly.
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Re: The Psychology of Money - A Blog Post

Post by 1210sda » Fri Jun 08, 2018 8:02 am

For me, this one stood out .....

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

1210

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Re: The Psychology of Money - A Blog Post

Post by David Jay » Fri Jun 08, 2018 8:43 am

1210sda wrote:
Fri Jun 08, 2018 8:02 am
For me, this one stood out .....

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

1210
Yup, that comes right back around to the Rihanna story in the article. When you convert your assets to "stuff", you have fewer assets.
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Re: The Psychology of Money - A Blog Post

Post by gouverneur » Fri Jun 08, 2018 8:50 am

1210sda wrote:
Fri Jun 08, 2018 8:02 am
For me, this one stood out .....

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

1210
Agreed. Living in Miami, I have bountiful examples of this on a daily basis.

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Re: The Psychology of Money - A Blog Post

Post by Grt2bOutdoors » Fri Jun 08, 2018 9:48 am

gouverneur wrote:
Fri Jun 08, 2018 8:50 am
1210sda wrote:
Fri Jun 08, 2018 8:02 am
For me, this one stood out .....

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

1210
Agreed. Living in Miami, I have bountiful examples of this on a daily basis.
When you have millions in the bank, you might as well enjoy it, what's the sense of being known as the richest man in the graveyard?
Not everyone who has a Benz in the driveway is poor and/or living beyond their means. There are plenty of wealthy folks living in Manhattan, their bank accounts are flush and their spending as landish as it may seem still does not keep up with the growth in assets. But then you also have those like Fifty Cent who just rented his luxury, he claims he has no money in his latest bankruptcy filing.
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Re: The Psychology of Money - A Blog Post

Post by larryswedroe » Fri Jun 08, 2018 10:05 am

thanks for posting, outstanding article and why many financial advisors say they don't manage money as much as they manage people

Larry

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Re: The Psychology of Money - A Blog Post

Post by delamer » Fri Jun 08, 2018 10:19 am

Grt2bOutdoors wrote:
Fri Jun 08, 2018 9:48 am
gouverneur wrote:
Fri Jun 08, 2018 8:50 am
1210sda wrote:
Fri Jun 08, 2018 8:02 am
For me, this one stood out .....

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

1210
Agreed. Living in Miami, I have bountiful examples of this on a daily basis.
When you have millions in the bank, you might as well enjoy it, what's the sense of being known as the richest man in the graveyard?
Not everyone who has a Benz in the driveway is poor and/or living beyond their means. There are plenty of wealthy folks living in Manhattan, their bank accounts are flush and their spending as landish as it may seem still does not keep up with the growth in assets. But then you also have those like Fifty Cent who just rented his luxury, he claims he has no money in his latest bankruptcy filing.
The real issue is when you start spending on luxury/upscale/nonessential purchases.

Is it once you have established financial security and know those purchases will not do financial harm?

Or is it as soon as you can qualify for the loan/lease/bump up in your credit limit, regardless of the impact on your long-term security?

Two very different scenarios.

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Re: The Psychology of Money - A Blog Post

Post by KlangFool » Fri Jun 08, 2018 10:28 am

delamer wrote:
Fri Jun 08, 2018 10:19 am
Grt2bOutdoors wrote:
Fri Jun 08, 2018 9:48 am
gouverneur wrote:
Fri Jun 08, 2018 8:50 am
1210sda wrote:
Fri Jun 08, 2018 8:02 am
For me, this one stood out .....

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

1210
Agreed. Living in Miami, I have bountiful examples of this on a daily basis.
When you have millions in the bank, you might as well enjoy it, what's the sense of being known as the richest man in the graveyard?
Not everyone who has a Benz in the driveway is poor and/or living beyond their means. There are plenty of wealthy folks living in Manhattan, their bank accounts are flush and their spending as landish as it may seem still does not keep up with the growth in assets. But then you also have those like Fifty Cent who just rented his luxury, he claims he has no money in his latest bankruptcy filing.
The real issue is when you start spending on luxury/upscale/nonessential purchases.

Is it once you have established financial security and know those purchases will not do financial harm?

Or is it as soon as you can qualify for the loan/lease/bump up in your credit limit, regardless of the impact on your long-term security?

Two very different scenarios.
+1.

http://www.thomasjstanley.com/2011/11/m ... rule-1-49/

<< I have found that when millionaires made their first home purchase, the ratio of the purchase price over their annual household income was just 1.49 [median]. >>

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Re: The Psychology of Money - A Blog Post

Post by Cody » Fri Jun 08, 2018 10:33 am

That is one great article. Thanks.

Cody

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Re: The Psychology of Money - A Blog Post

Post by David Jay » Fri Jun 08, 2018 11:08 am

larryswedroe wrote:
Fri Jun 08, 2018 10:05 am
thanks for posting, outstanding article and why many financial advisors say they don't manage money as much as they manage people

Larry
Nice to see you here!
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Re: The Psychology of Money - A Blog Post

Post by kaeltor » Fri Jun 08, 2018 11:10 am

Grt2bOutdoors wrote:
Fri Jun 08, 2018 9:48 am
gouverneur wrote:
Fri Jun 08, 2018 8:50 am
1210sda wrote:
Fri Jun 08, 2018 8:02 am
For me, this one stood out .....

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

1210
Agreed. Living in Miami, I have bountiful examples of this on a daily basis.
When you have millions in the bank, you might as well enjoy it, what's the sense of being known as the richest man in the graveyard?
Not everyone who has a Benz in the driveway is poor and/or living beyond their means. There are plenty of wealthy folks living in Manhattan, their bank accounts are flush and their spending as landish as it may seem still does not keep up with the growth in assets. But then you also have those like Fifty Cent who just rented his luxury, he claims he has no money in his latest bankruptcy filing.
Did he really file for bankruptcy again?

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Re: The Psychology of Money - A Blog Post

Post by goodenyou » Fri Jun 08, 2018 11:49 am

Great article. Many pearls of wisdom. Thanks for sharing. Will share with family and friends.
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Re: The Psychology of Money - A Blog Post

Post by goodenyou » Fri Jun 08, 2018 11:52 am

gouverneur wrote:
Fri Jun 08, 2018 8:50 am
1210sda wrote:
Fri Jun 08, 2018 8:02 am
For me, this one stood out .....

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

1210
Agreed. Living in Miami, I have bountiful examples of this on a daily basis.
"The paid-off mortgage that has replaced the BMW as the new status symbol".
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: The Psychology of Money - A Blog Post

Post by Grt2bOutdoors » Fri Jun 08, 2018 12:35 pm

goodenyou wrote:
Fri Jun 08, 2018 11:52 am
gouverneur wrote:
Fri Jun 08, 2018 8:50 am
1210sda wrote:
Fri Jun 08, 2018 8:02 am
For me, this one stood out .....

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

1210
Agreed. Living in Miami, I have bountiful examples of this on a daily basis.
"The paid-off mortgage that has replaced the BMW as the new status symbol".
^^Dave is that you? Great show you run, the common sense is just off the wall. Let's hear that Debt Free Scream!!
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Re: The Psychology of Money - A Blog Post

Post by Elbowman » Fri Jun 08, 2018 12:39 pm

I loved this one:
There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “This Guy Has Been Investing Consistently for Three-Quarters of a Century.”

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Re: The Psychology of Money - A Blog Post

Post by livesoft » Fri Jun 08, 2018 12:51 pm

Elbowman wrote:
Fri Jun 08, 2018 12:39 pm
I loved this one:
There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “This Guy Has Been Investing Consistently for Three-Quarters of a Century.”
And that's apparently how Grace Groner built her fortune, too. But there are not 2,000 books about that.
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Re: The Psychology of Money - A Blog Post

Post by randomguy » Fri Jun 08, 2018 1:08 pm

livesoft wrote:
Fri Jun 08, 2018 12:51 pm
Elbowman wrote:
Fri Jun 08, 2018 12:39 pm
I loved this one:
There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “This Guy Has Been Investing Consistently for Three-Quarters of a Century.”
And that's apparently how Grace Groner built her fortune, too. But there are not 2,000 books about that.
She is a totally nonBoglehead. Buying and holding stock in the company you work at. Way too much undiversified risk:) I would love to see the returns of any of the type of people. How much is just happening to pick a company that returns say 15% over 30 years. Doesn't happen much but it happens enough when you are looking at thousands of companies.

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Re: The Psychology of Money - A Blog Post

Post by livesoft » Fri Jun 08, 2018 1:21 pm

Sure, she could have left 2 to 20 times or even more to charity. But we have to remember index funds were not available most of her life.
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Re: The Psychology of Money - A Blog Post

Post by LazyNihilist » Fri Jun 08, 2018 2:04 pm

Brilliant article. Thanks for posting it.
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Re: The Psychology of Money - A Blog Post

Post by randomguy » Fri Jun 08, 2018 4:15 pm

livesoft wrote:
Fri Jun 08, 2018 1:21 pm
Sure, she could have left 2 to 20 times or even more to charity. But we have to remember index funds were not available most of her life.
Or she could have left 0 and been just like Richard Fuscon. Which is basically point 1 of this article. :)

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Re: The Psychology of Money - A Blog Post

Post by Fallible » Fri Jun 08, 2018 4:49 pm

randomguy wrote:
Fri Jun 08, 2018 1:08 pm
livesoft wrote:
Fri Jun 08, 2018 12:51 pm
Elbowman wrote:
Fri Jun 08, 2018 12:39 pm
I loved this one:
There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “This Guy Has Been Investing Consistently for Three-Quarters of a Century.”
And that's apparently how Grace Groner built her fortune, too. But there are not 2,000 books about that.
She is a totally nonBoglehead. Buying and holding stock in the company you work at. Way too much undiversified risk:) I ...
Actually, Grace Groner is a Boglehead in the key sense that she stayed the course and, as Housel puts it, "enjoyed eighty years of hands-off compounding." And "hands-off" is all the behavior Housel needs to make his point.
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Re: The Psychology of Money - A Blog Post

Post by Robert T » Fri Jun 08, 2018 6:19 pm

.
Great article.
“… the first rule of compounding is to never interrupt it unnecessarily.”

“Don’t do anything,” are the most powerful words in finance.

‘..the person with enough room for error in part of their strategy to let them endure hardship in the other part of their strategy has an edge…’

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Re: The Psychology of Money - A Blog Post

Post by mix » Fri Jun 08, 2018 6:42 pm

Does flaw #9 describe some of our behavior on this forum?

"9. Attachment to social proof in a field that demands contrarian thinking to achieve above-average results."

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Re: The Psychology of Money - A Blog Post

Post by delamer » Fri Jun 08, 2018 6:51 pm

mix wrote:
Fri Jun 08, 2018 6:42 pm
Does flaw #9 describe some of our behavior on this forum?

"9. Attachment to social proof in a field that demands contrarian thinking to achieve above-average results."
But the goal for many here is to capture the market return, not to achieve above-average results.

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Re: The Psychology of Money - A Blog Post

Post by mix » Fri Jun 08, 2018 7:03 pm

That is just a title for the behavior described... though one might argue that just performing average is actually an above-average outcome for an investor.

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Re: The Psychology of Money - A Blog Post

Post by delamer » Fri Jun 08, 2018 7:05 pm

mix wrote:
Fri Jun 08, 2018 7:03 pm
Ok... Though one might argue that just performing average is actually an above-average outcome for an investor.

But not for Boglehead investors. 8-)

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Re: The Psychology of Money - A Blog Post

Post by alter » Fri Jun 08, 2018 8:05 pm

I disagree with the author's comparison between his two investor examples using the "pyramid":

"Grace mastered the bottom blocks so well that the top blocks were hardly necessary."

Grace mastered the bottom block only. She bought one stock (her employer's stock which would be blasphemy to a boglehead, vs buying an index fund) and let it ride for 80 years, basically betting all on red on a Roulette wheel and possibly being an example of what could be considered someone with both a factor of luck and having mastering the bottom block only. So I agree the bottom block is the most important investing trait out of all those represented on the pyramid, but the pyramid idea is largely crap.

The article had some interesting aspects though.

But using the famous Grace example in this forum...not so sure. in each of the 80 years that Grace let her employer stock compound, Boglehead advocates would be telling her how insane she is, and that she should sell sell sell and buy an index fund ...ok with the exception of the years she invested before index funds came into existence, but still Bogleheads would have been diametrically opposed to her single stock pick/employer stock strategy, and advocated that she should instead diversify in non-employer stocks...even though she is the hero in the articles example.


Side note..the article implied Grace had no education, not true, she was a college grad from an expensive college.

"In what other field does someone with no education, no relevant experience, no resources, and no connections vastly outperform someone with the best education..."
Last edited by alter on Sat Jun 09, 2018 12:30 pm, edited 1 time in total.

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Re: The Psychology of Money - A Blog Post

Post by KlangFool » Fri Jun 08, 2018 8:44 pm

Folks,

Best quote from the blog post:

<<16. Optimism bias in risk-taking, or “Russian Roulette should statistically work” syndrome:
An over attachment to favorable odds when the downside is unacceptable in any circumstance.>>

<<Nassim Taleb says, “You can be risk loving and yet completely averse to ruin.”

The idea is that you have to take the risk to get ahead, but no risk that could wipe you out is ever worth taking. The odds are in your favor when playing Russian Roulette. But the downside is never worth the potential upside.>>

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Last edited by KlangFool on Fri Jun 08, 2018 9:04 pm, edited 1 time in total.

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Re: The Psychology of Money - A Blog Post

Post by Candor » Fri Jun 08, 2018 8:53 pm

One of my favourites: 'When most people say they want to be a millionaire, what they really mean is “I want to spend a million dollars,” which is literally the opposite of being a millionaire.'

Lots of wisdom in this blog. Thanks.

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Re: The Psychology of Money - A Blog Post

Post by Dendritic Tree » Fri Jun 08, 2018 9:07 pm

Love the article. It's completely true that behavior is the most important factor in successful investing. His arguments remind me of a great book called Your Money and Your Brain which looks at all the psychological pitfalls hardwired into poor investing decisions. So much of it is related to neurologically hardwired shortcuts that were hugely beneficial to our caveman ancestors (following social trends, overvaluing recency bias, avoidance of fear). Control your behavior (by simplicity, taking emotion out of the equation, automating things) and you eliminate those investing pitfalls emanating from your lizard brain.

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Re: The Psychology of Money - A Blog Post

Post by JMKEBogleGuy » Fri Jun 08, 2018 9:21 pm

I don't have time to read this now but the site looks very interesting and seems to have some great topics and outside the box thinking! Thanks for sharing!!

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