
The Psychology of Money - dsr12
http://www.collaborativefund.com/blog/the-psychology-of-money/
======
tr33house
Loved this letter to his son:

    
    
       Some people are born into families that encourage education; others are against it.
       Some are born into flourishing economies encouraging of entrepreneurship;
       others are born into war and destitution.
       I want you to be successful, and I want you to earn it.
       But realize that not all success is due to hard work, and not all poverty is due to laziness.
       Keep this in mind when judging people, including yourself."

------
roenxi
It is worth reflecting that, if Grace happened to be have a world outlook that
was a smidge more venal and materialist, she wouldn't have been able to do
what she did. This is because dying with $7 million in savings means that she
could have spent about $7 million more on enjoying herself in life.

I completely agree with her apparent outlook, and would rather have security
and the pride of knowing I'd given a lot more to my fellows than I've taken
back. And if everyone thought this way then society would be a lot better
about preserving and growing what we have.

However, I've met countless people who behave like the executive in the
opening paragraph not because they have 'bad behaviors', but precisely because
they are clever and in practice wanted to maximise money spent/personal
resources consumed. I doubt they would word that as harshly as I have, but the
implicit meaning behind the behavior is very clear.

Now, if you start with a value proposition that the purpose of the economy is
to maximise the resources available for individual consumption, it is actually
quite hard to argue for dying with savings. The families who try to maintain
inter-generational family wealth actually cop a fair bit of flack socially (in
times of stress, they seem to near inevitably get branded 'hoarders', and
times of extreme stress they have their wealth confiscated).

Basically, I like the argument and the value structure it comes from - but
there are other views of the situation that are reasonable and deserve
mention.

 _EDIT_ Fun fact, apparently $7 million gets you very close to the top 1% by
wealth [1]. So technically, the sort of people who want "the 1%" to do more
have people like Grace in their sights. We all know they don't want that, but
it shows the normal attitude to wealth and savings imo.

[1] [https://www.investopedia.com/articles/personal-
finance/05061...](https://www.investopedia.com/articles/personal-
finance/050615/are-you-top-one-percent-world.asp)

~~~
WalterBright
Consider the role of luck and risk. If you go to Vegas and gamble, your
returns are pretty much luck. But for the casino, the quantity of bets makes
their profits a virtual mathematical certainty, even though the outcome of
each bet is luck.

Transferring this idea to the stock market, outcomes from an individual stock
have a high degree of luck, but an investment in an index of stocks reduce the
luck factor by quite a bit and move towards mathematical inevitability.

~~~
Ntrails
Imagine you invested all of your retirement savings into "the index" a week
before black Friday and then describe how the results are mathematically
inevitable.

~~~
bryondowd
That's twisting some assumptions of the comparison. The comparison was to
casinos, which do not bet decades of profits on a single day's gambling. The
equivalent would be investing in your index every payday for decades, not
suddenly moving it all at once. That's where the mathematical near
inevitability comes from. You aren't betting on one day, one spin of the
wheel, you're betting on a general trend across ten thousand spins/days.

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ogennadi
> 3\. Rich man in the car paradox.

> 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.

Just realized that that is how I think... :facepalm:

~~~
tfha
When I see a rich car, I always think "heh I guess this guy likes to rub in
our faces that he has more money than us... this is why I could never buy a
nice car."

I'll probably drive a used corolla for my whole life just out of unwillingness
to make people feel like I'm better than they are.

I have similar troubles flying business class. At least let business class be
a separate plane >.>

~~~
ACow_Adonis
Look at it this way: conspicuous displays of wealth are very cheap signals for
the rational members of the human race to pick out what we call, in technical
sociological language, "wankers".

Indeed, nice cars say to me: "there's a moron who lacks taste/perspective, and
probably is really bad at managing their life and money. They probably have
large amounts of debt and leverage.".

You can call me judgmental, but its an infinitely better attitude to take than
anything approaching admiration/jealousy.

~~~
nunya213
Yeah the guy in a 1982 Volvo spewing black smoke and rusting to pieces is
obviously more financially savvy and responsible than someone driving a BMW.

~~~
duwease
Luckily for his point there are the other hundreds of millions of reliable
cars on the spectrum between a broken one and a premium one!

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anameaname
In Item 10 it says:

> One study I remember showed that young investors should use 2x leverage in
> the stock market, because – statistically – even if you get wiped out you’re
> still likely to earn superior returns over time.

And the linked paper says:

> The mistake in translating this theory into practice is that young people
> invest only a fraction of their current savings, not their discounted
> lifetime savings. For someone in their 30's, investing even 100% of current
> savings is still likely to be less than 10% of their lifetime savings

This makes a lot of sense to me and says what I haven't been able to about my
own risk tolerance. What is OPs counter to this? That the paper's conclusions
are flawed, or that no 20-something could execute it?

~~~
jplewicke
Someone actually tried to follow this advice starting in September 2007:
[https://www.bogleheads.org/forum/viewtopic.php?t=5934](https://www.bogleheads.org/forum/viewtopic.php?t=5934)
. Needless to say, it did not work out well for them and they almost went
bankrupt due to spiraling margin debt.

The difference between a mortgage and margin debt is that mortgages aren't
constantly marked to market, and you can continue to own the house even if
you're temporarily underwater on the mortgage. Whereas with margin, you can be
forced to sell if the value of the assets you've bought underperforms.

~~~
anameaname
The paper that was linked suggests using derivatives rather than directly
taking out loans, which are financially convertible. Specifically it says
buying deeply ITM call options for several years out strike date.

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tomcam
> she could have spent about $7 million more on enjoying herself in life

Well no, because it got to that level through compounding.

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empath75
> In what other field does someone with no education, no relevant experience,
> no resources, and no connections vastly outperform someone with the best
> education, the most relevant experiences, the best resources and the best
> connections?

I’ve seen it happen a bunch in the IT field.

~~~
sokoloff
It’s quite easy to outperform one of the worst performers in an industry. My
own financial condition is unremarkably stable and I’m crushing Mr Fuscone.

------
linkmotif
> and you cannot believe in risk without believing in luck, because they are
> two sides of the same coin.

Huhhh? Risk and luck are not at all obviously two sides of the same coin. How
does this duality work at all??

Risk can be measured, modeled, etc. It may not be accurate, but at least it’s
something you can define and attempt to model. Sure, sometimes you may behave
risky and not even realize it, given that future events may be totally
different from what you expected. But in reality risks are much more
transparent than luck. You can’t go and plausibly seek out luck, but you can
seek and easily find risk of any variety. Want some risk? Smoke a cigarette.

Unlike risk, luck is a far less tangible concept. How it occupies the same
side of the coin as risk—I have no idea. Where do you go to get luck? Risk may
yield reward, but why call that luck and not the “outcome”, which like all
outcomes carries a certain probability. Luck is just a pseudo-religious
moralization of outcome, mostly employed by people who are unlucky.

~~~
j7ake
Risk and luck can be two dies of the same coin. In your cigarette example, if
you smoked 2 packs of cigarettes a day and you did not get lung cancer, that
could be considered luck.

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fragsworth
> Richard Fuscone, former vice chairman of Merrill Lynch’s Latin America
> division, declared personal bankruptcy, fighting off foreclosure on two
> homes

It's worth noting (and not mentioned in the article) that this was a Chapter
11 bankruptcy, which is a reorganization of debts, and Mr. Fuscone did not
actually lose everything, and probably still has a lot of equity.

------
grosjona
There is no way that Grace would be able to save so much money if she had to
start today.

Now rent is higher, interest rates on savings are nonexistent, salaries for
low-skill office people are lower, companies are bigger and have less growth
potential ahead of them, employees have more restrictive roles, less leverage
over their employers and they rarely have access to high-value inside
information.

------
sametmax
Our mental model and relation to money is incredibly amusing.

E.G:

I travel a lot, and often end up with a few coins from countries remining in
my bags. I have friends of mine in the same situation, and they all have "that
drawer" filled with various coins that they will one day use again.

Me, I put them in the trash can. Every time I do that, people look at me like
I killed a puppy.

~~~
Asooka
Destroying coins and bills is illegal. While destroying a few coins won't have
interpol chasing you, it's still illegal and the "right" thing to do would be
to exchange them, or just give them to someone else who might pass through the
country.

~~~
cm2012
The waste of productive time this would entail is far worse than the waste of
a few bucks.

~~~
sametmax
See what I meant about the reactions of others ? We had immediat visceral
reactions that it's money and should not be wasted. No matter how realistic it
is, money is precious.

It's like this scene in 2012 where they burn notes to keep warm, but for a
moment they hesitate.

------
ChuckMcM
Copied that one into Evernote. That is a lot of received wisdom distilled down
into some really useful bits.

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shmerl
_> I want to spend a million dollars,” which is literally the opposite of
being a millionaire. _

As the saying goes, you don't take money with you to the next world. So the
goal of spending money (on some good cause of course) is incomparably better
than the goal of gaining money itself.

~~~
dgacmu
If you know exactly when you'll die and the sequence of future expenses you'll
incur between now and then. Having money is useful insurance.

It's all about asking the marginal benefit of saving or spending each
additional dollar. At some points, you derive more out of spending -- such as
when you're spending them on basic necessities, or when you have a large pile
that can already cover those 99th percentile emergencies. And, of course,
being able to estimate your own utility for those. Which is hard.

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baxtr
_She was, by all accounts, a lovely lady. But she lived a humble and quiet
life. That made the $7 million she left to charity after her death in 2010 at
age 100 all the more confusing._

That made me wonder: Are there charities that are run like VCs?

~~~
mnx
Kinda, yes:
[https://app.effectivealtruism.org/funds](https://app.effectivealtruism.org/funds)

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peter303
Pretty much Orman's thesis the past 20 years, especially early books

~~~
q-base
Who is Orman? And which book could you recommend?

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bytematic
I think that almost any motivator for working or keeping society together
would have been abused. This is truly interesting.

