Excerpts - The Psychology of Money

July 17, 2021

Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.Money—investing, personal finance, and business decisions—is typically taught as a math-based field, where data and formulas tell us exactly what to do. But in the real world people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together.In The Psychology of Money, award-winning author Morgan Housel shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important topics.

Bill Gates went to one of the only high schools in the world that had a computer. The story of how Lakeside School, just outside Seattle, even got a computer is remarkable. Bill Dougall was a World War II navy pilot turned high school math and science teacher. “He believed that book study wasn’t enough without real-world experience. He also realized that we’d need to know something about computers when we got to college,” recalled late Microsoft co-founder Paul Allen. In 1968 Dougall petitioned the Lakeside School Mothers’ Club to use the proceeds from its annual rummage sale—about $3,000—to lease a Teletype Model 30 computer hooked up to the General Electric mainframe terminal for computer

My favorite historian, Frederick Lewis Allen, spent his career depicting the life of the average, median American—how they lived, how they changed, what they did for work, what they ate for dinner, etc. There are more relevant lessons to take away from this kind of

At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.” Enough. I was stunned by the simple eloquence of that word—stunned for two reasons: first, because I have been given so much in my own life and, second, because Joseph Heller couldn’t have been more accurate. For a critical element of our society, including many of the wealthiest and most powerful among us, there seems to be no limit today on what enough entails. It’s so smart, and so powerful. Let me offer two examples of the dangers of not having enough, and what they can teach us.

Rajat Gupta was born in Kolkata and orphaned as a teenager. People talk about the privileged few who begin life on third base. Gupta couldn’t even see the baseball stadium. What he went on to achieve from those beginnings was simply phenomenal. By his mid 40s Gupta was CEO of McKinsey, the world’s most prestigious consulting firm. He retired in 2007 to take on roles with the United Nations and the World Economic Forum. He partnered on philanthropic work with Bill Gates. He sat on the board of directors of five public companies. From the slums of Kolkata, Gupta had quite literally become one of the most successful businessmen alive. With his success came enormous wealth. By 2008 Gupta was reportedly worth $100 million.11 It’s an unfathomable sum of money to most. A five percent annual return on that much money generates almost $600 an hour, 24 hours a day. He could have done anything he wanted in life. And what he wanted, by all accounts, wasn’t to be a mere centa-millionaire. Rajat Gupta wanted to be a billionaire. And he wanted it badly. Gupta sat on the board of directors of Goldman Sachs, which surrounded him with some of the wealthiest investors in the world. One investor, citing the paydays of private equity tycoons, described Gupta like this: “I think he wants to be in that circle. That’s a billionaire circle, right? Goldman is like the hundreds of millions circle, right?”12 Right. So Gupta found a lucrative side hustle. In 2008, as Goldman Sachs stared at the wrath of the financial crisis, Warren Buffett planned to invest $5 billion into the bank to help it survive. As a Goldman board member Gupta learned of this transaction before the public. It was valuable information. Goldman’s survival was in doubt and Buffett’s backing would surely send its stock soaring. Sixteen seconds after learning of the pending deal Gupta, who was dialed into the Goldman board meeting, hung up the phone and called a hedge fund manager named Raj Rajaratnam. The call wasn’t recorded, but Rajaratnam immediately bought 175,000 shares of Goldman Sachs, so you can guess what was discussed. The Buffett-Goldman deal was announced to the public hours later. Goldman stock surged. Rajaratnam made a quick $1 million. That was just one example of an alleged trend. The SEC claims Gupta’s insider tips led to $17 million in profits. It was easy money. And, for prosecutors, it was an even easier case. Gupta and Rajaratnam both went to prison for insider trading, their careers and reputations irrevocably ruined.

THERE ARE A million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.

Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

Investor Mohnish Pabrai once asked Buffett what happened to Rick. Mohnish recalled: [Warren said] “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry.” What happened was that in the 1973–1974 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, so he got margin calls. He sold his Berkshire stock to Warren—Warren actually said “I bought Rick’s Berkshire stock”—at under $40 a piece. Rick was forced to sell because he was levered.18 Charlie, Warren, and Rick were equally skilled at getting wealthy. But Warren and Charlie had the added skill of staying wealthy. Which, over time, is the skill that matters most. Nassim Taleb put it this way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.”

More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.

“The great investors bought vast quantities of art,” the firm writes.19 “A subset of the collections turned out to be great investments, and they were held for a sufficiently long period of time to allow the portfolio return to converge upon the return of the best elements in the portfolio. That’s all that happens.” The great art dealers operated like index funds. They bought everything they could. And they bought it in portfolios, not individual pieces they happened to like. Then they sat and waited for a few winners to emerge. That’s all that happens. Perhaps 99% of the works someone like Berggruen acquired in his life turned out to be of little value. But that doesn’t particularly matter if the other 1% turn out to be the work of someone like Picasso. Berggruen could be wrong most of the time and still end up stupendously right. A lot of things in business and investing work this way. Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes. That can be hard to deal with, even if you understand the math. It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.

Disney’s first studio went bankrupt. His films were monstrously expensive to produce, and financed at outrageous terms. By the mid-1930s Disney had produced more than 400 cartoons. Most of them were short, most of them were beloved by viewers, and most of them lost a fortune. Snow White and the Seven Dwarfs changed everything. The $8 million it earned in the first six months of 1938 was an order of magnitude higher than anything the company earned previously. It transformed Disney Studios. All company debts were paid off. Key employees got retention bonuses. The company purchased a new state-of-the-art studio in Burbank, where it remains today. An Oscar turned Walt from famous to full-blown celebrity. By 1938 he had produced several hundred hours of film. But in business terms, the 83 minutes of Snow White were all that mattered.

good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy. Tails drive everything.

The Chris Rock I see on TV is hilarious, flawless. The Chris Rock that performs in dozens of small clubs each year is just OK. That is by design. No comedic genius is smart enough to preemptively know what jokes will land well. Every big comedian tests their material in small clubs before using it in big venues. Rock was once asked if he missed small clubs.

When I start a tour, it’s not like I start out in arenas. Before this last tour I performed in this place in New Brunswick called the Stress Factory. I did about 40 or 50 shows getting ready for the tour. One newspaper profiled these small-club sessions. It described Rock thumbing through pages of notes and fumbling with material. “I’m going to have to cut some of these jokes,” he says mid-skit. The good jokes I see on Netflix are the tails that stuck out of a universe of hundreds of attempts. A similar thing happens in investing. It’s easy to find Warren Buffett’s net worth, or his average annual returns. Or even his best, most notable investments. They’re right there in the open, and they’re what people talk about. It’s much harder to piece together every investment he’s made over his career. No one talks about the dud picks, the ugly businesses, the poor acquisitions. But they’re a big part of Buffett’s story. They are the other side of tail-driven returns. At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them. Charlie Munger followed up: “If you remove just a few of Berkshire’s top investments, its long-term track record is pretty average.”

The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.

People like to feel like they’re in control—in the drivers’ seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.

I had a day job in midtown Manhattan paying $20K per year—about minimum wage ... I never ate out, and never took a taxi. My cost of living was about $1000/month, and I was earning $1800/month. I did this for two years, and saved up $12,000. I was 22 years old. Once I had $12,000 I could quit my job and become a full-time musician. I knew I could get a few gigs per month to pay my cost of living. So I was free. I quit my job a month later, and never had a job again. When I finished telling my friend this story, he asked for more. I said no, that was it. He said, “No, what about when you sold your company?” I said no, that didn’t make a big difference in my life. That was just more money in the bank. The difference happened when I was 22.26

John D. Rockefeller was one of the most successful businessmen of all time. He was also a recluse, spending most of his time by himself. He rarely spoke, deliberately making himself inaccessible and staying quiet when you caught his attention.

A refinery worker who occasionally had Rockefeller’s ear once remarked: “He lets everybody else talk, while he sits back and says nothing.” When asked about his silence during meetings, Rockefeller often recited a poem: A wise old owl lived in an oak, The more he saw the less he spoke, The less he spoke, the more he heard, Why aren’t we all like that wise old bird?

Rockefeller was a strange guy. But he figured out something that now applies to tens of millions of workers. Rockefeller’s job wasn’t to drill wells, load trains, or move barrels. It was to think and make good decisions. Rockefeller’s product—his deliverable—wasn’t what he did with his hands, or even his words. It was what he figured out inside his head. So that’s where he spent most of his time and energy. Despite sitting quietly most of the day in what might have looked like free time or leisure hours to most people, he was constantly working in his mind, thinking problems through.

This was unique in his day. Almost all jobs during Rockefeller’s time required doing things with your hands. In 1870, 46% of jobs were in agriculture, and 35% were in crafts or manufacturing, according to economist Robert Gordon. Few professions relied on a worker’s brain. You didn’t think; you labored, without interruption, and your work was visible and tangible. Today, that’s flipped. Thirty-eight percent of jobs are now designated as “managers, officials, and professionals.” These are decision-making jobs. Another 41% are service jobs that often rely on your thoughts as much as your actions.

More of us have jobs that look closer to Rockefeller than a typical 1950s manufacturing worker, which means our days don’t end when we clock out and leave the factory. We’re constantly working in our heads, which means it feels like work never ends.

Compared to generations prior, control over your time has diminished. And since controlling your time is such a key happiness influencer, we shouldn’t be surprised that people don’t feel much happier even though we are, on average, richer than ever. What do we do about that? It’s not an easy problem to solve, because everyone’s different. The first step is merely acknowledging what does, and does not, make almost everyone happy.

No one—not a single person out of a thousand—said that to be happy you should try to work as hard as you can to make money to buy the things you want. No one—not a single person—said it’s important to be at least as wealthy as the people around you, and if you have more than they do it’s real success. No one—not a single person—said you should choose your work based on your desired future earning power.

“Your kids don’t want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them,” Pillemer writes.

It was my dream to have one of these cars of my own, because (I thought) they sent such a strong signal to others that you made it. You’re smart. You’re rich. You have taste. You’re important. Look at me. The irony is that I rarely if ever looked at them, the drivers. 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.

“You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.”

It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.

Modern capitalism makes helping people fake it until they make it a cherished industry. But the truth is that wealth is what you don’t see. Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

Singer Rihanna nearly went bankrupt after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”

“There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have. It’s really that simple.”31 It is excellent advice, but it may not go far enough. The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth.

Rich is a current income. Someone driving a $100,000 car is almost certainly rich, because even if they purchased the car with debt you need a certain level of income to afford the monthly payment. Same with those who live in big homes. It’s not hard to spot rich people. They often go out of their way to make themselves known. But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.

Past a certain level of income people fall into three groups: Those who save, those who don’t think they can save, and those who don’t think they need to save.

The first idea—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.

Investment returns can make you rich. But whether an investing strategy will work, and how long it will work for, and whether markets will cooperate, is always in doubt. Results are shrouded in uncertainty. Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.

Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.

Past a certain level of income, what you need is just what sits below your ego.

Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility. When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little. It’s a daily struggle against instincts to extend your peacock feathers to their outermost limits and keep up with others doing the same. People with enduring personal finance success—not necessarily those with high incomes—tend to have a propensity to not give a damn what others think about them.

Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you. As I argue often in this book, money relies more on psychology than finance.

A hyper-connected world means the talent pool you compete in has gone from hundreds or thousands spanning your town to millions or billions spanning the globe. This is especially true for jobs that rely on working with your head versus your muscles: teaching, marketing, analysis, consulting, accounting, programming, journalism, and even medicine increasingly compete in global talent pools. More fields will fall into this category as digitization erases global boundaries—as “software eats the world,” as venture capitalist Marc Andreesen puts it.

Intelligence is not a reliable advantage in a world that’s become as connected as ours has. But flexibility is. In a world where intelligence is hyper-competitive and many previous technical skills have become automated, competitive advantages tilt toward nuanced and soft skills—like communication, empathy, and, perhaps most of all, flexibility. If you have flexibility you can wait for good opportunities, both in your career and for your investments. You’ll have a better chance of being able to learn a new skill when it’s necessary. You’ll feel less urgency to chase competitors who can do things you can’t, and have more leeway to find your passion and your niche at your own pace. You can find a new routine, a slower pace, and think about life with a different set of assumptions. The ability to do those things when most others can’t is one of the few things that will set you apart in a world where intelligence is no longer a sustainable advantage. Having more control over your time and options is becoming one of the most valuable currencies in the world. That’s

In his memoir, Nike founder Phil Knight wrote about his early days in business: There was no such thing as venture capital. An aspiring young entrepreneur had very few places to turn, and those places were all guarded by risk-averse gatekeepers with zero imagination. In other words, bankers.

Some people are remarkably good at avoiding single points of failure. Most critical systems on airplanes have backups, and the backups often have backups. Modern jets have four redundant electrical systems. You can fly with one engine and technically land with none, as every jet must be capable of stopping on a runway with its brakes alone, without thrust reverse from its engines. Suspension bridges can similarly lose many of their cables without falling. The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future. The trick that often goes overlooked—even by the wealthiest—is what we saw in chapter 10: realizing that you don’t need a specific reason to save. It’s fine to save for a car, or a home, or for retirement.

The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future. The trick that often goes overlooked—even by the wealthiest—is what we saw in chapter 10: realizing that you don’t need a specific reason to save. It’s fine to save for a car, or a home, or for retirement.

Predicting what you’ll use your savings for assumes you live in a world where you know exactly what your future expenses will be, which no one does. I save a lot, and I have no idea what I’ll use the savings for in the future. Few financial plans that only prepare for known risks have enough margin of safety to survive the real world. In fact, the most important part of every plan is planning on your plan not going according to plan.

At every stage of our lives we make decisions that will profoundly influence the lives of the people we’re going to become, and then when we become those people, we’re not always thrilled with the decisions we made. So young people pay good money to get tattoos removed that teenagers paid good money to get. Middle-aged people rushed to divorce people who young adults rushed to marry. Older adults work hard to lose what middle-aged adults worked hard to gain. On and on and on.

Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum.

Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves. It’s the equivalent of a stranger making major life decisions for you. Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimize future regret. The quicker it’s done, the sooner you can get back to compounding.

Being swayed by people playing a different game can also throw off how you think you’re supposed to spend your money. So much consumer spending, particularly in developed countries, is socially driven: subtly influenced by people you admire, and done because you subtly want people to admire you. But while we can see how much money other people spend on cars, homes, clothes, and vacations, we don’t get to see their goals, worries, and aspirations. A young lawyer aiming to be a partner at a prestigious law firm might need to maintain an appearance that I, a writer who can work in sweatpants, have no need for. But when his purchases set my own expectations, I’m wandering down a path of potential disappointment because I’m spending the money without the career boost he’s getting. We might not even have different styles. We’re just playing a different game. It took me years to figure this out. A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.

The main thing I can recommend is going out of your way to identify what game you’re playing.

But pessimism holds a special place in our hearts. Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.

Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.

Pessimism just sounds smarter and more plausible than optimism. Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.

A constant drumbeat of pessimism usually drowns out any triumphalist song ... If you say the world has been getting better you may get away with being called naïve and insensitive. If you say the world is going to go on getting better, you are considered embarrassingly mad. If, on the other hand, you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize. In my own adult lifetime ... the fashionable reasons for pessimism changed, but the pessimism was constant.

The intellectual allure of pessimism has been known for ages. John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”

Part of it is instinctual and unavoidable. Kahneman says the asymmetric aversion to loss is an evolutionary shield. He writes: When directly compared or weighted against each other, losses loom larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.

money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.

Pessimists often extrapolate present trends without accounting for how markets adapt.

Progress happens too slowly to notice, but setbacks happen too quickly to ignore.

But the story of the Wright Brothers’ quest to build the first plane has a fascinating twist. After they conquered flight, no one seemed to notice. Nobody seemed to care. In his 1952 book on American history, Frederick Lewis Allen wrote: Several years went by before the public grasped what the Wrights were doing; people were so convinced that flying was impossible that most of those who saw them flying about Dayton [Ohio] in 1905 decided that what they had seen must be some trick without significance—somewhat as most people today would regard a demonstration of, say, telepathy. It was not until May, 1908—nearly four and a half years after the Wright’s first flight—that experienced reporters were sent to observe what they were doing, experienced editors gave full credence to these reporters’ excited dispatches, and the world at last woke up to the fact that human flight had been successfully accomplished.

Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant. It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together.

When we think about the growth of economies, businesses, investments and careers, we tend to think about tangible things—how much stuff do we have and what are we capable of? But stories are, by far, the most powerful force in the economy. They are the fuel that can let the tangible parts of the economy work, or the brake that holds our capabilities back.

At the personal level, there are two things to keep in mind about a story-driven world when managing your money. 1. The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.

The people were more addicted to prophecies and astrological conjurations, dreams, and old wives’ tales than ever they were before or since … almanacs frighted them terribly … the posts of houses and corners of streets were plastered over with doctors’ bills and papers of ignorant fellows, quacking and inviting the people to come to them for remedies, which was generally set off with such flourishes as these: ‘Infallible preventive pills against the plague.’ ‘Neverfailing preservatives against the infection.’ ‘Sovereign cordials against the corruption of the air.’

Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.

When planning we focus on what we want to do and can do, neglecting the plans and skills of others whose decisions might affect our outcomes. Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck. We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs.

Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong. Because it’s never as good or as bad as it looks. The world is big and complex. Luck and risk are both real and hard to identify. Do so when judging both yourself and others. Respect the power of luck and risk and you’ll have a better chance of focusing on things you can actually control. You’ll also have a better chance of finding the right role models. Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see. So wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future. No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today. Manage your money in a way that helps you sleep at night. That’s different from saying you should aim to earn the highest returns or save a specific percentage of your income. Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested. To each their own. But the foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions. If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away. It can’t neutralize luck and risk, but it pushes results closer towards what people deserve. Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune, because a small minority of things account for the majority of outcomes. No matter what you’re doing with your money you should be comfortable with a lot of stuff not working. That’s just how the world is. So you should always measure how you’ve done by looking at your full portfolio, rather than individual investments. It is fine to have a large chunk of poor investments and a few outstanding ones. That’s usually the best-case scenario. Judging how you’ve done by focusing on individual investments makes winners look more brilliant than they were, and losers appear more regrettable than they should. Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance. Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome. Save. Just save. You don’t need a specific reason to save. It’s great to save for a car, or a downpayment, or a medical emergency. But saving for things that are impossible to predict or define is one of the best reasons to save. Everyone’s life is a continuous chain of surprises. Savings that aren’t earmarked for anything in particular is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment. Define the cost of success and be ready to pay it. Because nothing worthwhile is free. And remember that most financial costs don’t have visible price tags. Uncertainty, doubt, and regret are common costs in the finance world. They’re often worth paying. But you have to view them as fees (a price worth paying to get something nice in exchange) rather than fines (a penalty you should avoid). Worship room for error. A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance, and endurance is what makes compounding magic over time. Room for error often looks like a conservative hedge, but if it keeps you in the game it can pay for itself many times over. Avoid the extreme ends of financial decisions. Everyone’s goals and desires will change over time, and the more extreme your past decisions were the more you may regret them as you evolve. You should like risk because it pays off over time. But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time. Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game. Respect the mess. Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you. Now let me tell you what works for me.

SANDY GOTTESMAN, A billionaire investor who founded the consulting group First Manhattan, is said to ask one question when interviewing candidates for his investment team: “What do you own, and why?”

Just show me what you do with your own money.

Ken Murray, a professor of medicine at USC, wrote an essay in 2011 titled “How Doctors Die” that showed the degree to which doctors choose different end-of-life treatments for themselves than they recommend for their patients.70 “[Doctors] don’t die like the rest of us,” he wrote. “What’s unusual about them is not how much treatment they get compared to most Americans, but how little. For all the time they spend fending off the deaths of others, they tend to be fairly serene when faced with death themselves. They know exactly what is going to happen, they know the choices, and they generally have access to any sort of medical care they could want. But they go gently.” A doctor may throw the kitchen sink at her patient’s cancer, but choose palliative care for herself.

There’s a part of our household financial plan I’m proud of it’s that we got the goalpost of lifestyle desires to stop moving at a young age. Our savings rate is fairly high, but we rarely feel like we’re repressively frugal because our aspirations for more stuff haven’t moved much. It’s not that our aspirations are nonexistent—we like nice stuff and live comfortably. We just got the goalpost to stop moving.

On the rare occasion when I question our savings rate I think of the independence my parents earned from years of high savings, and I quickly come back. Independence is our top goal. A secondary benefit of maintaining a lifestyle below what you can afford is avoiding the psychological treadmill of keeping up with the Joneses.

Nassim Taleb explained: “True success is exiting some rat race to modulate one’s activities for peace of mind.”

We’re so far committed to the independence camp that we’ve done things that make little sense on paper. We own our house without a mortgage, which is the worst financial decision we’ve ever made but the best money decision we’ve ever made. Mortgage interest rates were absurdly low when we bought our house. Any rational advisor would recommend taking advantage of cheap money and investing extra savings in higher-return assets, like stocks. But our goal isn’t to be coldly rational; just psychologically reasonable.

The independent feeling I get from owning our house outright far exceeds the known financial gain I’d get from leveraging our assets with a cheap mortgage.

I don’t try to defend this decision to those pointing out its flaws, or those who would never do the same. On paper it’s defenseless. But it works for us. We like it. That’s what matters. Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.”

We also keep a higher percentage of our assets in cash than most financial advisors would recommend—something around 20% of our assets outside the value of our house.

But everything I’ve learned about personal finance tells me that everyone—without exception—will eventually face a huge expense they did not expect—and they don’t plan for these expenses specifically because they did not expect them.