17. The Seduction of Pessimism

+) Seduction : attractive quality of something
+) Pessimism : Emphasizing or thinking of the bad pard of a situation rather than the good part

Poeple like to hear that the world is going to hell

• Historian Deirdere McCloskey

Optimism

• Sounds like a sales pitch
• But Real Optimism
  - Don't beleve that everything will be great
  - Odds of a good outcome are in your favor over time, even when there will be setbacks along the way

ex) Wake up in the morning trying to make things a llittle better and more productive

Pessimism

• Sounds like someone trying to help you
• Sounds smarter
• Often viewed as being oblivious to risk

Resons why pessimism is seductive

1. Money is ubiquitous, so something bad happening tends to affect everyone and captures everyone's attention

• Losses loom larger than gain
• Organism that treat threats as more urgent than opportunities have a better chance to survive and reprocude

• Recession barreling down on the economy could impact every single person, including you, so pay attention

• Few question or try to explain why the market went up
• There is almost always an attempt to explain why it went down

2. Pessimist often extrapolate present trends without accouting for how market adapt

• Assuming that something ugly will stay ugly is an easy forecast to make
• But problem correct and people adpat
• That's a common plot of economic history that is too easily forgotten by pessimists who forecast in straight lines

3. That progress happens too slowly to notice, but setbacks happen too quickly to ignore

• New compare that slow, years-long awakening to becoming optimistic about the airplane to how quickly people pay attention to drivers of pessimism, like a coporate bankruptcy
• Optimistic narratives requires looking at a long stretch of history and evelopments

• Growth is driven by compounding which always takes time
• Failures can happen overnight

In investing you must identify the price of success - volatility and loss amid the long backdrop of growth - and be willing to pay it

• Pessimism reduces expectiation, narrowing the gap between possible outcomes and outcomes you feel great about

18. When you'll believe anything

Appealing fictions, and why stories are more powerful than statistics

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

• Fictions can make you believe just about anything
• Investing is one of the only fields that offers daily opportunities for extreme rewards
• There is no greater force in finance than room for error, and the higher the stakes the wider it should be

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

• I don't know what i don't know
• So i am just as susceptible to explaining the world though the limited set of mental models I have at my disposal

• Hindsight, the ability to explain the past, gives us the illusion that the world is understandable
• Coming to terms with how much you don't know means coming to terms with how much of what happends in the world is out of your control

• Risk is what's left over when you thing you've thought of everything
• We focus on what we know and neglect we do not know, which makes us overly confident in our beliefs

• Entrepreneurs naturally focus on what they know best, they know less about their competitors

• The one who's confident he knows what happening based on what he sees but turns out to be completely wrong because he can't know the stories going on inside everyone else's head?
• He's all of us

19. All together now

What we've learned about the psychology of your own money

• Financial advisor are universal truths in money, even if people come to different conclusions about how they want to apply those truths to their own finances
• Respect the power of luck and risk and you'll have a better chance of focusing on things you can actually control

• 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

• Time is the most powerful force in investing
• If 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

• Save. Just save. You don't need a specific reason to save.
• But saving for things that are impossible to predict or define is one of the best reasons to save

• The most financial costs don't have visible price tags
• 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

• Define the game you're playing, and make sure your actions are not being influenced by people playing a different game

• Respect the mess
• There is no single right answer; just the answer that works for you

20. Confessions

The psychology of my own money

• The difference between what someon suggests you do and what they do for themselves isn't always a bad thing
• What works for one person may not work for another
• You have to find what works for you. Here's what works for me

How my family thinks about savings

• Independence, at any income level, is driven by your saving rate
• Cash is the oxygen of independence

How my family thinks about investing

• Every investor should pick a strategy that has the hishest odds of successfully meeting their goals
• My friends whoes job it is to beat the market. I respect what they do. But this is what works for us.
• My investing strategy relies on a high saving rate, patience and optimism that the global economy will create value over the next several decades
• No matter how we save or invest I'm sure we'll always have the goal of independence and we'll always to whatever maximizes for sleeping well at night

We think it's the ultimate goal; the mastery of the psychology of money
But the each their own. No one is crazy.