← The Psychology of Money with Morgan Housel
The Psychology of Money with Morgan Housel
The Purpose of Independence, Lazy Work, and Believing Forecasts.
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- [00:01]
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Morgan Housel
Welcome back. And maybe you noticed, maybe you didn't, but this podcast now has a new name. Same podcast as it's always been. Same ideas that we've done for the last many episodes here. Still just going to be me yapping up here in front of this microphone and camera, but it's now called the Psychology of Money with Morgan Housel. Why did I do this? Well, the truth is, when I began this podcast three years ago, I could not think of any name. I really didn't know what I wanted to do with the podcast. So I gave it the most creative name that I could think of, which was the Morgan Housel Podcast. But I never really wanted it to be that. I just needed to think of something else. I have an idea with book titles that fits in here. Every book title should be self explanatory about what the book is about. If you're getting really creative with an abstract title that nobody really understands what it's about, it's hard to make the proposition to the reader or the listener in this case, of what you're going to do for them. And so the Psychology of Money if somebody asked, what is the psychology of Money about? It's about the psychology of money. You don't need any other explanation. That's what we're talking about. I do. Of course, that was the title of my first book and I do want to give you a little short story about where that idea came from, about where that title name came from. Back in 1996, Charlie Munger gave a speech, wrote a speech, gave a speech in Southern California. The title of the Speech was the psychology of human misjudgment. And it is phenomenal. No matter who you are or what field you're in or what you're interested in, you can learn a tremendous amount from that speech. It doesn't have much to do with investing. It's about, hey, self explanatory, the psychology of human misjudgment. All of the biases and errors that people use when justifying and making decisions, and it's phenomenal. Not only did I love the speech, I love the title and I love the format of the title. The Psychology of where you're not giving advice, you're not telling people what to do, you're examining what is going through people's heads when they are making decisions about certain topics. And why I loved it is because I think it could be so you could transfer that idea to so many different topics. For me, it was money. I've always been a financial writer, so the psychology of money made sense. But you could also, somebody else could write a book or start a podcast called the Psychology of Politics, the psychology of health, the psychology of sports, the Psychology of education. Any topic that we're thinking of, you could do it. You could use that format very effectively where you're not telling people what to do because you don't know them to begin with. This is not one on one. You're examining how people justify the decisions that they make. Where we go wrong, how we're all different. I always love that idea. That's where the title of my book came from. And that's the title of this new podcast. But nothing else is going to change. Just new logo, new title. Before I get into your questions, I want to talk about a topic that's actually going to lead into the first question. So I'm cheating a little bit here. This is kind of a preamble to the first question. Many years ago, I was probably 25 years old at the time. I read a book by a guy named Felix Dennis, who was a very successful, very rich, famous at the time, publisher, published a lot of magazines back in the 1990s that were huge, very successful. He wrote a book called how to Get Rich. Now I don't even know if I'd recommend the book. It's kind of a young person's book. But for me, at the time, when I was a young person reading it, I loved it. It was great. And I keep a lot of notes when I read books, highlight passages and whatnot. And I was going back through my notes a couple months ago, from when I read this book a long time ago. And I highlighted one passage from the book and I want to read you that passage. This is from Felix Dennis, who again, was very successful, very wealthy, worked very hard. He said, quote, if I had my time again, knowing what I know today, I would dedicate myself to making just enough money to live comfortably as quickly as I could. By the time I was 35, I would then cash out and retire to write poetry and plant trees. That's what Felix Danink said. On one hand, I want to say awesome quote. Love that quote. Beautiful. It is the absolute idea of having enough, make enough money so that you can live the life that you want to live. Go do something else. Half of me thinks this is a beautiful quote and I love it. The other half of me says, really dangerous to say things like that. Easy to fool yourself with ideas like that, that I'm going to work very hard to make as much money as I can and then I'm going to quit and then I'm going to go enjoy my life. The two ways and reasons why I think this can be a flawed way of thinking is, number one, kind of a silly way to live a life. Kind of the ultimate delayed gratification to the most extreme end. To say I'm going to be miserable doing something that I probably don't really enjoy so that one day in the future I can have a good life. From a philosophical perspective, that would not fly for me. I like to enjoy every day. I want to give another anecdote, another analogy to writing. Someone once told me, and I thought this was great writing advice, that you should not build up your writing to an exciting conclusion. All of the writing needs to be enjoyable from the first sentence. The first page should be fun to read. The third page should be fun to read. You want it to all be good. And isn't a lot of life like that too? Yes, I believe in delayed gratification, saving, of course, but all of it should be fun. We should enjoy a lot of it. Maybe not every single moment, and that's unrealistic, but a lot of it. So that's why I think it can be dangerous. Number two, this is more important. It is so easy to tell yourself that you're working hard and you're making sacrifices so that one day you won't have to. And if you get to that one day, quote unquote, at some point in the future and you stop working so that you can then begin to enjoy yourself, a lot of people will learn the hard way that their work was their identity. And maybe if you wouldn't use the word identity, their work was the very important challenge in their life that kept them mentally stimulated and gave them a sense of purpose and utilizing their brain and working towards something and accomplishing something. And when you remove that, they realized that they were actually no better off. Maybe some of them desperately, deeply missed the fun, challenging, not always enjoyable work that they did before. Now, Felix Dennis, if you know him, you're about to call me out on this. Planting trees and writing poetry was his passion. And so that quote actually fits his life very well. But if you use poetry and planting trees as just like a euphemism for going out and not. Not doing much anymore, and that would be an enjoyable life, like your whole life is a vacation, that can get very difficult. I think there is a very profound and fundamental and universal truth that people need hard problems to work on. I was at a conference a couple weeks ago, and the topic that comes up so very often these days is a wealthy parent saying, how do I transfer money to my kids without ruining their ambition? We've talked about this before. It comes up all the time. And one of the parents framed it in a way that I really liked. And she said, we don't want our kids to suffer. We do want them to struggle. Struggle is important now, of course, not suffer, not miserable, but struggle on important problems that give yourself meaning and purpose. And with that, I want to get into the first question, which again is very related to this topic. The question is from Noble and Noble writes, the traits required to build wealth, which are ambition and grit and a constant grind mindset, are often the exact traits that prevent people from walking away when they have enough. The identity that created your security becomes an addiction that locks the golden handcuffs. How does an ambitious person successfully shut off that internal engine without experiencing an identity? Cris Noble, good question. Very good question. And let me first say, it is extremely rare that someone who has the traits to work that hard and build up enough wealth to where they don't need to work anymore can just one day detach themselves from that engine and go proverbially plant trees and write poetry. As Felix Dennis said, it is extremely rare that someone does that. And when you do do it, when you find someone who does who does it, they end up in one of two camps. Number one is a person who ends up borderline, if not literally depressed. If you think hard work is hard, try boredom. It can be absolutely mentally taxing. That's one. That's number one. Or number two, they found a new challenge to work on that maybe was closer to their soul. They weren't working for money, but they were working on a new challenge that exercised their brain every single day. There's a great Jeff Bezos quote that I love where he says, if you can enjoy half of your work, if 50% of the time you're having fun at work, that's a good, balanced, realistic goal to get to. Inherent in that is, even in the best job in the world, the most fulfilling, rewarding. Whatever adjectives you want to use for your job, half the time, you're probably not going to enjoy it that much. And that's true for a lot of things. A pro athlete half the time on the field is miserable. They're in physical pain, they're frustrated at how their team's doing, whatever it might be. If you can enjoy half of it, that is really good. And so the short answer, there's many answers to this question. The short answer is, in order to detach from that ambition that you had, you need to channel the energy that you had in your career into something else that is maybe more meaningful to you, but is probably just as challenging. I'll give you an example of this that I hear very often from older parents. Now my kids are on the younger side, like kids are 7 and 10. And I hear very often from older parents whose children are moved out. Maybe they're in their retirement years. And if you were to ask them the question, when were you happiest in life, maybe happy is the wrong word, but when did you enjoy life the most? It is so common that those older parents or retired parents will tell you, we were happiest when we had young kids, or we today envy people who have young kids. And I kind of wince when I hear that because it's never great to hear that these are the good old days that I'm experiencing right now. Because it's hard right now. Young kids are very, very challenging. And maybe that's the point, that when you have young kids and they're so hard to take care of and they wake you up in the middle of the night and you don't have any free time and your house is a mess, and going down the list of what it's like, it's very hard, it's very challenging, but it gives you an immense, overwhelming sense of purpose, that maybe you don't realize it at the time, but once that purpose is taken away from you and your kids move out of the house, you realize how valuable it was in your life. And so let me get back to the question and summarize this in a way that I hope makes sense to you. To me, the purpose of financial independence is not to remove all worry and all struggle from your life. It is to have the privilege and the honor of being able to choose a new problem and a new struggle in your life. It is saying, I don't need to go out and grind in a 9 to 5 job that didn't fit my personality. And for co workers who I didn't enjoy, whatever it might be, I can find a new struggle. I can go do something else. Prime example of this was the guy who effectively founded the FIRE movement, financial independence. Retire early, 15 or 20 years ago. This guy named Mr. Money Mustache. That was the handle that he went by. He's a blogger, he's still out there blogging. He's. He's a really cool guy. And his name is Pete Adney. And the short story of Pete Attne was he saved up, I think it was $600,000, and retired when he was 30, something like that. The more complicated story was he did not retire. He quit his office job and then he went out to like build houses and do construction projects. And he was constantly backfilling his time with projects that were meaningful and very challenging and I'm sure very frustrating. He kept himself active, he kept himself busy. The last thing I'll say about this is that if you do not choose a new challenge, if you do not choose a new stress, when you become financially successful, one will find you, one will catch up with you. I have this idea that there is a minimum level of stress that people need in their life. And if they're not achieving that stress from good, legitimate problems, they will make up or anchor on another form of stress that is maybe much less meaningful. If you're not worried about raising kids and if you're not worried about a challenge in your workplace, whatever it might be, you will make up another problem. Whether it's worrying about politics, worrying about tribal identities among people. If you're not worried about a higher level problem, you will eventually settle on a lower level problem. The most outrageous, extreme examples of this is if you go back to like big natural disasters like wars and hurricanes and those kind of things where they do a lot of devastation and physical trauma to one society. And then you go back years later and you ask those people what it was like in those times. A lot of the psychological studies, sociological studies, have looked back at those times and they talk to those People. And the answer from a lot of those people was yes, those times were incredibly difficult and challenging, but it gave society an immense sense of purpose and cohesion. After World War II, there were a lot of sociologists who studied what that kind of war did, does to people from a society perspective, psychological perspective. And I want to read you a passage from one of the psychologists named Charles Fritz. This is from a book by Sebastian Younger. He writes, Fritz's theory was that modern society has gravely disrupted the social bonds that have always characterized the human experience and that disasters thrust people back into a more ancient, organic way of relating. Disasters. He proposed create a community of sufferers that allows individuals to experience an immensely reassuring connection to others. As people come together to face an existential threat, Fritz found class differences are temporarily erased, income disparities become irrelevant, race is overlooked, and individuals are assessed simply by what they are willing to do for the group. It is kind of a fleeting social utopia that Fritz felt is enormously gratifying to the average person and downright therapeutic to people suffering from mental illness. That is the most extreme example. I know you're talking about making enough money so that you don't have to go to work anymore. Not the London Blitz, very different examples. But that idea that people need and thrive, in fact off of challenge, where you're working towards a very defined purpose, is real. I will actually answer your question now because what part of the question was asking for a mental model to think about this idea? I heard this mental model for sports a couple years ago and I loved it. And it was called the rule of thirds, which is if you are an athlete in training, one third of the days that you train, you should feel really good. You should be like, that was great, I'm making progress. One third of the days should feel okay. Like, ah, I was struggling out there, but it was okay. And one third of the day should feel painful. You should feel like you were physically in poor shape, you pushed too hard, you were falling back, you weren't achieving what you wanted to achieve. That is a good balanced plan for an athlete. One third of the time you know those, those thirds that, that are broken out. Because I think if all of your days are good, you're not pushing yourself hard enough. If all of your days are bad, you're pushing yourself too much. And so I think that rule of thirds for athletes can be applied to many other fields. Okay, next question. This one's from Ross. He says your thoughts on predictions in your June 11th video had me wondering about what psychological factors influence Investors who either believe or don't believe forecasts. Ross, great question. I've thought about this idea of why people believe forecasts for many, many years. Because everyone knows, or if you don't know, there's a lot of evidence out there, the accuracy of financial and economic predictions from the smartest, most educated, most informed people out there is abysmal. You would not. If you understand the track record of how poor these things, you sit back and wonder why people still pay any attention to them. But rather than just saying, well, people are silly and stupid and they're just, they're going along with it, I think there's actually some psychological explanations for why people do this. And I would propose this question to you. If you received a medical diagnosis that was better than you expected or was news that you didn't want to hear, which one of those would you seek a second opinion for? If you had some medical symptoms and you went to a doctor and the doctor told you, hey, we did some tests, you all clear, came back negative, get nothing to worry about, or if the doctor came back and said, this is not looking good, we think this is cancer, not looking good for you, which one of those two would you seek a second opinion for? And I'm willing to bet overwhelmingly that would be the latter, that if you got good news that you wanted to hear, you would just say, great, I'm going to hold on to that. If you got bad news that you didn't want to hear, you would seek a second opinion. And I think a lot of that reason why, there's many reasons, but a lot of the reason why is because your willingness to believe a forecast overwhelmingly depends on whether or not you want it to be true and how much you need it to be true. And when people hear things that they want to be true, they're much more likely to accept them versus when people hear things that they don't want to be true, they are much more likely to dig in and seek a second opinion. And a lot of times in finance, whether it's a forecast from a company or an economist, if they're telling you something that you want to believe or something that you need to believe, even if you understand the track record of how bad these forecasts are, you are likely to say, that feels good. And I want to believe that, because what the forecaster just did for you is they didn't necessarily give you a roadmap to the future because in your gut, you know, it's all bs and those forecasts are not going to play out anyways, what they did is they, in your mind, they've removed a layer of uncertainty for you. And there's a lot of value in that for you. I wrote about this in the Psychology of Money. From the example I used was an article that I read many, many years ago about a mother in a village in Yemen. And she had a very sick young child, I think it was five years old, who was dying. And there was no hope for medical intervention. There was no health care system to speak of in their village. And so one of the ancient remedies that they used for a sick child was for a tribal elder to take a burning stick and to plunge it into the child's chest. Now, of course, that is horrific. That was the point of the article. And so someone, the journalist interviewing this mother said, why would you do that? What in the world are you doing to your child? And the mother said, when your child is sick and you have no money, you are willing to believe anything. And I think like a lot of things, you take a very extreme example of that as what actually happens to virtually all of us in scenarios that are much less meaningful and where the stakes are much lower. And I. But I think that is a real thing when the. When you are uncertain and you feel like there is no hope for digging out of whatever situation that you're in, you are willing to believe anything. Back during the great plague of London, Daniel Defoe wrote this in 1722, he said, writing about the great plague of London back in 1722, Daniel Defoe wrote, the people were more addicted to prophecies and astrological conjurations and dreams and old wives tales than they ever were before or since. When the stakes are really high, people will believe anything. And so I think that is the answer to your question. Your willingness to believe a forecast depends heavily on how much you want it to be true. And I think this also explains a lot of pundits why they still exist. Because their job is not to forecast the future. Their job is to remove uncertainty in your mind in what we all know is a very uncertain world. And if, as a pundit, you tell people what they want to hear, you can be wrong indefinitely without penalty. All right, next question from Marta. She says, I've been thinking about a question that has been debated for decades, but which seems especially relevant today, and that is, is this time really different? More specifically, do you believe that the current environment in the stock market represents a genuine structural shift, or is it another cycle that investors are overinterpreting along the Same lines. Do you think the American empire is truly in decline, with global economic and financial leadership gradually shifting elsewhere? Marta? Very good question that a lot of people are thinking about. That's why I picked this question. I want to read to you a quote from the author, James Baldwin, who wrote this in life magazine in 1963. He said, you think your pain and your heartbreak are unprecedented in the history of the world. But then you read. And he went on to say it was reading books that made him realize that all of what he was going through at that moment in his life, personally and throughout the broader world had all been experienced by everyone before that. I wrote about this in my book, same as ever. The quote that I love from Voltaire where he says, history never repeats itself, but man always does. And I think that gets to the core of the question. Are the details of what we're dealing with today unprecedented? Well, sure, in the details where we're dealing with AI and wars between certain countries and whatnot, the absolute details and the people who are. Who are involved in that are unprecedented. But if we had a time machine and we went back a hundred years ago and we told whoever we were talking to a hundred years ago that in the economy of 2026, we are dealing with a new technology, that his future is uncertain and it's going to upend a lot of current jobs, the person 100 years ago would completely understand that idea. If we told the person from 100 years ago that our politics are becoming tribal and global superpowers are losing power and new powers are gaining power, the person 100 years ago would completely understand that. If we said that politicians all around the world are trying to consolidate as much power as they can, they would completely understand that 100 years ago, going down the list of a lot of the struggles that we're going with today. And of course, the cast of characters is different, but it's the same movie that people have been dealing with over and over and over again. At the broad level, the details are always different. The broad strokes of what is happening tends to be the same story over and over again. But I don't want to poo poo the question. And so what I thought about was, what is truly different this time? What obviously is different this time? And I came up with a short little list. Well, number one is we're more connected than ever. Information travels much faster. And what somebody is thinking in Bangladesh can be broadcast and understood and read or watched by anyone in the world. Anybody has the attention of everybody is effectively how the world works. That's unprecedented. And it makes it so that not only is information traveling much further, but the range of your horizon, the scope of your horizons, of who you're paying attention to and whose lives you are more aware of is much broader than it's ever been. And so that is a fundamental difference. I think we compare ourselves more to other people than we have at other, at any other point in history because we have the technology to do that. It used to be that if you lived on a farm in Ohio, you had no idea how a UK aristocrat was living. You didn't know what kind of car they drove or how big their house was. You was completely out of sight, out of mind. Now virtually everyone has a decent idea of how everybody else lives. And it makes the social comparison and envy, if not jealousy, that much greater. Another change that is more challenging for me to describe. I'm going to sound crass if I say this, but that is not the intention whatsoever, is that I think globally, but especially in the developed world, existential problems have been replaced with more superficial problems. And this gets back to the first point we were talking to, with people having a minimum level of stress. If you were to go back 100 or 200 years ago and you talked about, you asked people what their biggest problems were, their problems would be existential food, shelter, surviving war. And of course, there are many people in the world dealing with those existential problems today, right now. But for the majority of the people listening to this, it's not that food is not your issue, shelter is not your issue, surviving a war is not your issue. For the vast majority of people listening to this, there are other people out there. Of course, the problems that a lot that we deal with now are more social, fitting into the social group that we want, keeping up with the Joneses, so to speak, issues of fulfillment, issues of enjoying your work, those kind of issues that are not, not something to poo poo those problems, but they are lower level problems, lower order problems than the problems that we used to deal with. Now why I don't want to poo poo, that is because I think psychologically that can be a very tormenting thing to deal with because the path you're on is so uncertain. If the existential, your problem, problem that you're dealing with is how do I get food? The end goal is very obvious of what you're trying to do. You're trying to acquire food. It's very obvious if the existential problem that you're dealing with is how do I fit into the social group? That's actually a very difficult problem to solve because if you are to achieve that next social rung, you're just going to cast your gaze to the next one and you never feel like you're going to solve your problem. And so I think the problems that we deal with are different than they've ever been. Part of that to me is an optimistic side of how much we've progressed over time that for most people watching this at least, the problem is not how do you find food and shelter. The problem is how do I fit in socially and culturally into the tribal groups that I want to a very different problem over time. And I think those are the kind of things that truly are different this time, even if the waves of how people react to certain events of greed and fear and uncertainty really are not. That's it for this episode. Please keep sending in your questions to podongtermwords.com and again, my standard disclosure, I'm not your financial advisor, so take all of that with a grain of salt. These are just my opinions and thank you for watching and we'll see you next time.
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