The Psychology of Money summary

When economists model financial behavior, they often rely on a convenient fiction – rational individuals who make self-interested decisions that maximize their returns. 

Reality, of course, is a bit messier than this neat idea. Consider, for example, the lottery. The average low-income household in the United States spends $411 on lotto tickets every year. At the same time, around 40 percent of all households struggle to find $400 in an emergency. Unsurprisingly, this 40 percent is made up of the same low-income households who spend just over $400 on lottery tickets. 

A toy poodle doesn’t look much like its wild ancestors, who, in turn, weren’t all too different from wolves. 

This shouldn’t surprise us – today’s dog breeds have a ten-thousand-year history of domestication behind them. And yet dog owners are often surprised at the instinctual, bloodthirsty responses of their pets when they spot a squirrel or a cat. Ten millennia, it turns out, haven’t completely eradicated these deep-rooted wild traits. 

A couple of years back, the author asked the Nobel Prize–winning economist Robert Schiller what he’d most like to know about investing that can’t be fully known. Schiller’s answer: the “exact role of luck in successful outcomes.” 

Luck is a tricky topic. Few investors and entrepreneurs would deny that it plays a role in theory, but it’s hard to quantify the extent to which it’s responsible for one firm prospering – and another failing. We also tend to think that it’s rude to attribute others’ successes to blind chance. As a result, we often end up ignoring the role of luck when it comes to financial decision-making. That’s a mistake. 

Bill Gates once quipped that success is a lousy teacher. 

As Gates sees it, success tricks smart people into overlooking the role of luck, which in turn makes them think that they can’t lose. Paradoxically, that’s a pretty surefire way of ensuring that you do lose. 

Capitalism is great at two things – generating wealth and envy. 

Take a rookie baseball player who makes $500,000 a year. By any reasonable standard, he’s rich. But say he plays on the same team as a superstar like Mike Trout, who makes $36 million a year – suddenly, he’s not happy with what he earns. He wants what others have. 

There were few better stock market traders in early twentieth-century America than Jesse Livermore. Born in 1877, he helped build Wall Street. By the age of 30, he was worth $100 million in today’s dollars.

Just before the crash of 1929, Livermore made the best decision of his career: he took a short position and bet that stocks would decline. Sure enough, the market lost one third of its total value. While fortunes were liquidated and news spread of bankrupt investors leaping from office windows, Livermore returned home to his family with great news. He’d just made the modern equivalent of $3 billion. 

According to his own account, Heinz Berggruen didn’t show much promise in his youth. When he was forced to flee Nazi Germany in 1936, he wasn’t sure what to do with his life. 

After studying literature at the University of California, Berkeley, he worked as a journalist with a sideline in art criticism. In 1940, he bought a small watercolor by an artist called Paul Klee for $100. It was the beginning of a lifelong passion for modern art.