The Psychology of Money, From a Venture Capitalist’s Perspective
Morgan Housel’s new book focuses on stories about money, not tips
Here’s a common advice I hear a lot when it comes to spending.
If you see something that you really like, put it in your basket (online or in person) then abandon your basket for several days. Give yourself time to think about the purchase. If you’re still thinking about it several days later, then go ahead and buy it. And if you’re in a physical store, just leave it.
I love this kind of advice because it has prevented me from buying so many things that I think I need but doesn’t actually need. They’re simply wants. Most of the time, I’d forget about the items unless the website sends me an email reminding me of my unattended basket. (Unfortunately, for Amazon, it just stays around forever.)
Spending money is such an intentional act, and yet it’s not at the same time. We tend to buy things impulsively. That’s why many stores utilize product placement in a very purposeful way — to attract you, at the last minute, to buy something because you saw out of the corner of your eye. See the containers of gum while waiting to check out? What about all the candies? They’re just a few bucks, so why not?
This kind of thinking is dangerous, one we should be weary of. That’s what makes Morgan Housel’s new book so interesting, one that I’m planning to read (it just came out on September 8th, so my copy hasn’t arrived yet).
Mr. Housel is a mid-thirties venture capitalist/blogger who writes about money and how we think about it. In a recent interview with the Wall Street Journal ($$), he reiterated some basic principles about money — mainly the fact that the book he wrote, The Psychology of Money — isn’t really about money. Described as a book on “how to think about investing,” by finance writer Jason Zweig in this article, it’s definitely a unique way to connect a broad concept into a specific type of behavior.
“Investing isn’t an IQ test; it’s a test of character”
Not only is investing about a test of character, it’s also a test of other attributes. In a famous study published in 1972, researchers gave four and five year olds a marshmallow and told them that they can either eat it now OR wait 15 minutes for a second marshmallow. This is known as the “marshmallow test.” The results were clear — those who waited for the second marshmallow ended up more successful in life than those who did not, according to follow up studies on the children. (Susan Wojcicki, the CEO of YouTube was one of the participants.)
The study was a test of character — of delayed gratification.
In this book and in the live WSJ talk, Mr. Housel implanted this fact as a very important aspect of investing. He gave an example of a multimillionaire who gave people cash up front so that they can go buy him gold coins who later became bankrupt. Another example on the opposite spectrum was of a man who was a janitor, and for many years, invested in blue chip companies and accumulated millions of dollars and donated all the money to charity when he died. It brings forth the question — how do you practice delayed gratification? Is it an innate ability or is it something that one can learn over time?
Speaking of Mr. Warren Buffet as an example, Mr. Housel stated that Buffet accumulated the majority of his wealth after age 65, even though he began to invest at a very early age.
“Money isn’t primarily a store of value. Money is a conduit of emotion and ego, carrying hopes and fears, dreams and heartbreak, confidence and surprise, envy and regret.” — Jason Zweig, Wall St Journal
Thinking about money in terms of human behavior made me think of the spending advice above. I realized just how important it is to be patient with yourself. Even though the world has changed a lot in the past century, certain things have not changed. People’s anxieties and fears about market crashes, their actions immediately after it, or their feelings of fear, greed, vulnerability and ego still hangs around. The only difference between back then and now, according to Mr. Housel, is the fact that we have much more information nowadays. Markets update every day, numbers fluctuate constantly; not only that, we have a barrage of books and literature on how to invest, how to budget, how to do this or that with our money. It can be quite overwhelming.
Perhaps one of the hardest things to accept is volatility. In a world riddled with uncertainty, especially right now during the pandemic, we all want to feel like we know something about the future. We want to be comforted with information, but at the same time, more information does not comfort us — it only makes us feel more anxiety.
Instead of trying to fix yourself, says Housel, try to learn from your mistakes. Accept the fact that volatility will happen with investing. And refrain from jumping to action. Reviewing accounts often is a smart thing to do, but it’s not smart to act in the heat of the moment. They say patience is virtue, and in the world of investments and finance, this can’t be truer. After all, “it’s not about how smart you are — it’s about how you behave.”