The Psychology of Money

“Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris — I wanted the independence. I desperately wanted it.”

— Charlie Munger

The world can appear vastly unequal in terms of the goods and services that people are able to consume. To the slum dweller in Mumbai or Rio de Janeiro, the lifestyle of a middle class American would seem utterly unbelievable. A middle class American would find the spending power of a family worth $20 million completely inconceivable. And the family worth $20 million cannot conceive of the spending power of a billionaire like Warren Buffett or Jeff Bezos.

Wealth can buy material goods and services and this is what most people focus on, both in terms of satisfying their desire to consume as well as their desire to appear successful in the eyes of their peers. But a relentless focus on the material goods that wealth can purchase badly misses the point.

The truth is that time is the currency of life.

The ability to control your time means that you have the ability to control how the most valuable resource you own is spent. The middle class American’s life expectancy might not be quite as long as the life expectancy of a billionaire. Money can indeed purchase better medical care and, for some people, that can provide more time. But the truth is that Jeff Bezos and Warren Buffett cannot hope to enjoy multiples of the time that the rest of us can enjoy on this earth. Their time is limited, just as time is limited for all of us. However, they have both had something that most of us do not have: the ability to control how they spend every day of their lives starting from a very early age.

Most people will never be worth $5 million or $20 million, let alone worth billions. But it is within the power of people earning middle class incomes to design their lives in a manner that gives them increasing control of their time, and with that control comes the prospect of an increased level of satisfaction with life and greater happiness.

As Morgan Housel writes in The Psychology of Money, “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.” If you are reading these words and nodding your head in agreement, you are vastly ahead of the game because this idea is far outside the mainstream of how people view money. For most people, the thought of money is inextricably linked with the goods and services it can buy and how those things will make their lives better and happier. The idea of saving money is grudgingly conceded to be a necessary, but distasteful, thing that responsible people must do. Most consumers view the next paycheck or bonus in terms of what it can buy, not the independence it can provide. And this makes intuitive sense at first glance. Aren’t the wealthy happier than the middle class and the middle class happier than the poor? It seems obvious that this would be the case. How could it not be the case when money can be used to buy so much cool stuff?

For someone in poverty, being able to consume more stuff clearly will increase happiness. The ability to have as much food as your family needs, to have warm clothing in the winter, to be able to air-condition your home in summer, and to have a washer and dryer to avoid going to the laundromat — these are all tangible improvements for someone moving from poverty into the middle class. But beyond a certain point, hedonic adaptation takes hold. You keep ratcheting up your consumption, which brings transitory happiness at best, but soon find yourself right back where you started, except now your baseline set of expectations has grown requiring you to maintain your spending to avoid feeling deprived.

Morgan Housel has been writing about finance and investing for over a decade, getting his start at The Motley Fool and later writing a column for The Wall Street Journal. Housel is currently a partner at the Collaborative Fund and writes frequently on personal finance topics. His approach to money and investing is to view it through the lens of psychology because the human element stands far above all other factors when it comes to the results a person can expect to achieve over time. As Housel notes, investing is one of the very few fields that offer ordinary people daily opportunities for extreme rewards. If you view money through the lens of consumption, the temptation to try your luck in this casino can be overwhelming. However, if you view losing money or interrupting the process of compounding as losing control of your time and sacrificing your liberty, the temptation to gamble is much reduced.

Tame Your Ego

Ego is often the root cause of dysfunctional financial decisions. What are we really trying to accomplish when we buy a fancy house or a $100,000 car? Sure, such things might offer personal utility and enjoyment, at least for a while. But eventually, hedonic adaptation takes over and these new things become the baseline. What many people who consume such items are actually trying to do is signal to others that they have “made it”. They are successful and wealthy and should be looked up to. They want to be admired. And maybe even envied.

Housel asserts that “past a certain level of income, what you need is just what sits below your ego.” Would it bother you if your neighbors do not admire the car that you drive to work each morning? Or if they see you waiting for the bus a block away instead of driving at all? Would it bother you if your co-workers find out that you live in a more modest neighborhood than someone of your income could “afford”? As Housel says, people who are successful with their personal finances “tend to have a propensity to not give a damn what others think about them.”

Wealth is What You Don’t See

There are some interesting paradoxes in personal finance that seem totally obvious once you think about them but escape the consciousness of almost everyone. Housel’s chapter entitled “Wealth is What You Don’t See” gets the prize for an insight that is both extremely valuable and obvious, at least once you pause for a few moments to think about it.

When you see a person driving down the street in a Ferrari, what do you automatically think? “Oh, that’s a rich guy driving down the street.” But do we really know that about the driver? We have no real idea if that is the case or not. Housel uses his experiences as a valet at an upscale hotel to note several important things about drivers of expensive cars. One of the regulars at the hotel who drove a Porsche later showed up in an old Honda after the Porsche was repossessed. But when the regular drove the Porsche, did Housel admire the driver? No, he admired the car, not the driver! Driving a fancy car is evidence of either debt or extinguished wealth. It is not evidence of wealth.

Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes foregone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

That’s not how we think about wealth, because you can’t contextualize what you can’t see.

When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.

The Psychology of Money, p. 98

What could be more obvious? If you want to be wealthy, you must defer consumption. Your wealth, to the extent you invest it in financial assets, is hidden from the world. Few things remain taboo in modern American society, but it is still taboo to go around talking about the size of your bank account or how many shares of stock you own. Those things are invisible whereas what you wear, what you drive, and the home you live in are visible to all. But all of those things are the opposite of wealth. Many people who consume such items are wealthy because they also have financial assets. But they are less wealthy when they consume these items. They may enjoy it, it may be easily affordable, and there’s nothing wrong with consumption, but the fact is that what people think of as wealth is really the opposite of wealth.

What Should You Do?

Providing financial advice is notoriously difficult and those who provide it have an awesome responsibility. Financial advisors are responsible for guiding a client’s financial health in the same way that a doctor is responsible for guiding a patient’s health. Most personal finance books have roadmaps that purport to be actionable things that people can do to achieve their objectives. But Housel does not provide specific prescriptions for what you should do with your money. Why? He doesn’t know you, he doesn’t know what you want, he doesn’t know when you want it, and he has no idea regarding your motivations. This is refreshingly honest but, as is the case with many areas of the book, quite obvious once you pause to think about it.

Instead of providing specific financial advice, Housel does a great job of framing money and wealth in the context of the psychology of human beings, recognizing that it is wrong to simply assume that others are crazy because their decisions do not seem rational to us.

However, this does not mean that the book lacks practical advice.

The wisdom contained in these pages is not going to come from some specific prescription regarding what to do with your investment portfolio, but it could convince people to have an investment portfolio because savings is important, whether you have a specific goal for saving or not. It could convince people that time is the true currency of life and that having control of that time is perhaps the ultimate benefit of wealth. It could increase the humility of those who believe that conspicuous consumption leads to recognition and respect.

It’s All About Freedom

The bottom line is that financial independence is not about what you can consume. It is also not necessarily about quitting your job and retiring. Instead, financial independence is about freedom. Freedom to choose to spend your time as you see fit. Freedom to not do things that you do not want to do. Freedom to not associate with people who you dislike.

When viewed through the lens of freedom, personal finance is no longer the boring and tedious topic that many perceive it to be. Instead, it becomes an essential component of living a good life.

The Illusion of Control

The headlights of the eighteen wheeler suddenly appeared in my rearview mirror and I could tell it was quickly approaching. The rain had stopped but the roadway was still wet as Interstate 81 descended into the town of Christiansburg in Virginia’s long and scenic Shenandoah Valley. As I passed the slow-moving van in the right lane, the massive truck was suddenly tailgating and flashing its lights in annoyance. As I sped up to nearly eighty miles per hour and merged back into the right lane ahead of the van, the truck flew by on my left, coming perilously close to sideswiping my small rental car.

As Marcus Aurelius wrote, “You could leave life right now. Let that determine what you do and say and think.”1 Taking risks in life is unavoidable because the world is full of perils and one cannot live in the world without accepting this reality. However, the choices we make can greatly influence the chances of encountering various types of risk as well as the consequences of negative outcomes. Being oblivious to peril may make life temporarily more pleasant and certain people might go through a long lifetime unscathed through sheer luck. But that doesn’t seem like an intelligent way to bet.

The unpleasant reality is that we are in less control of our lives than we would like to admit.

We all seek to control the path of our lives and guarantee a positive outcome, but we could depart from this life at any moment of any day. And we cannot afford to ever forget that.

Why did I choose to drive over two thousand miles earlier this month rather than fly to my destination? The answer is that my perception of the risks of COVID-19 led me to rent a car and drive in order to avoid potential exposure at airports and on commercial flights. In making this decision, I most certainly did not eliminate risk. Instead, I shifted one type of risk for another. I traded the risk of exposure for a few hours on a commercial flight for the risk of exposure during the inevitable stops that are part of a long road trip. In addition, I traded the very low risk of death as a result of a commercial airline accident for the substantially higher risk of death due to an automobile accident.2

Correctly assessing risk is fraught with peril because it is all too easy to think about risk in ways that make no sense. Additionally, it is easy to think that you have more control over certain situations than you actually have. For example, nearly three-quarters of Americans believe that they are above average drivers which is obviously not possible. This is true even though nearly all drivers admit that they have engaged in unsafe driving practices at various times. The illusion of control coupled with a delusional sense of superior skills leads to systemically underestimating certain types of risk. Auto accidents are simply things that happen to bad drivers, not to us.

Of course, it only takes a minimal amount of thought to conclude that the risks of driving are, in fact, much greater than flying in normal times. Even if you insist on believing that your driving skills are above average, all of those other terrible drivers are out there and can cause accidents that could injure or kill you.

Two years ago, I was a passenger in a car that was struck in a low speed collision by a driver who made an illegal left turn. Although there were no serious injuries, my ribs were bruised badly enough to make running impossible for two weeks. There’s nothing like being slapped with reality to realize what can happen to the human body in a collision at highway speeds.

We control much less in our lives than we would like to acknowledge in normal times. Making decisions in the midst of a pandemic throws in another variable that makes rational risk assessment even more difficult.

I think that I am an above average driver (who doesn’t?), but I have driven enough miles in my life to know that being on the road is inherently dangerous. Coupled with the sheer boredom of interstate highway driving for hundreds of miles per day, the drudgery of traffic jams, and the interminable construction during summer months, I would normally opt to fly on any trip likely to require more than eight hours of driving. However, somehow COVID-19 altered my perception of risk to the point where I thought of driving as lower risk when considering the odds of infection.

The illusion of control makes it more appealing to travel in a private vehicle than to accept the risk of being in a long metal tube with potentially over a hundred other passengers in close proximity. There is no control when traveling on an airplane. Not in terms of controlling the safety of the aircraft’s operation or the behavior of other passengers who might be just a few feet away. There is no way to know if the person seated behind you or across the aisle has COVID-19. There is no way to stop someone who decides to take off their mask and happens to sneeze without covering their face. Random behavior, even with no malicious intent, can occur on a flight.

Of course, when you travel long distances in a car, you have to stop at various times to use the bathroom, purchase fuel for the car, and eat meals. And although I tried to cover both 1,100 mile one-way trips without stopping for the night, eventually the risk of continuing to drive after sixteen or seventeen hours on the road forced me to stay in motels on both legs of the trip. Every one of these interactions brings potential exposure to COVID-19 as well. I cannot control what the person in the next row of an airplane does, and neither can I control whether the person at the front desk at the hotel takes his mask of and sneezes just as I’m walking in the door.

A quick Google search regarding the COVID-19 transmission risk of traveling on a commercial flight yields hundreds of links with varying opinions. However, there is compelling evidence to suggest that the air on commercial flights is actually cleaner than the air found in many other settings such as restaurants, grocery stores, or private residences. A recent National Geographic article makes the following points regarding aircraft that are equipped with HEPA filters:

About 40 percent of a cabin’s air gets filtered through this HEPA system; the remaining 60 percent is fresh and piped in from outside the plane. “Cabin air is completely changed every three minutes, on average, while the aircraft is cruising,” says Becker. (Lufthansa has a video showing how HEPA filters work.)

Officially, certified HEPA filters “block and capture 99.97 percent of airborne particles over 0.3 micron in size,” says Tony Julian, an air-purifying expert with RGF Environmental Group. The efficiency of these filters, perhaps counterintuitively, increases for even smaller particles. So while the exhaled globs that carry SARS-CoV-2 can be quite small, HEPA filters effectively remove the vast majority from the air.

National Geographic

Of course, the effectiveness of filters only exists if the air travels through the filter before reaching you. There is still a risk of direct contact with an infected person who could spread the virus directly to you. Your seating location on a plane also can have a significant impact on your risk of infection, with those in window seats toward the front of the plane having the lowest risk of encountering other passengers. Obviously, staying seated rather than moving around the cabin further reduces risk in flight. Masks are the best tool to avoid person-to-person transmission before air can travel through the filters.

In order to travel on a commercial flight, one must navigate not only the airplane itself but the airport terminal. Some of the measures in place, such as temperature screening, might have an element of “security theater” since asymptomatic transmission of COVID-19 has been common. However, by barring symptomatic passengers, requiring masks, and ensuring social distancing, navigating an airport seems no more perilous than navigating the grocery store. Certain airlines such as Southwest, have taken additional precautionary measures to limit risk such as capping the number of passengers on a flight to ensure that middle seats are empty, except when family members choose to sit next to each other. Southwest flights also undergo deep cleaning and there are advanced HEPA filters on board.

The available information we have today makes it clear that the best policy is to limit exposure in general and clearly travel brings about inevitable opportunities for exposure. However, nearly six months into this pandemic, a certain level of travel becomes necessary for many people and once you decide that you need to get from point A to point B, the relevant question is to weigh the relative risks of modes of travel. The illusion of control might make it seem like driving limits the risk of COVID-19 exposure relative to getting into that long metal tube and “surrendering control”, but the illusion is irrational. Next month when I travel to the same destination again, I plan to fly on Southwest Airlines rather than accept the hazards that come with driving 2,200 miles.

As I reached the outskirts of Birmingham, I was optimistic that I had enough time to make it to my destination by midnight. I had already driven nearly eight hundred miles, traffic was moving quickly, the afternoon storms were over, and the sun was beginning to set as I drove west on Interstate 20. Suddenly the traffic came to a complete stop. Another traffic jam probably caused by the interminable construction taking place all over the country. Google maps showed a long red line extending into the city, indicating a long delay.

A half hour later, the line of fire trucks and ambulances in the distance made it obvious that this was not a construction delay. As traffic narrowed to a single lane on the left shoulder to pass the scene, I first saw the burnt out cab of the truck, still smoldering. Then I saw the unrecognizable remains of a small vehicle that had been totally destroyed in a way that was obviously not survivable.

One or more people clearly lost their lives that afternoon, but you will never read about them on the front page of a newspaper or hear a television reporter tell their life stories. The idea that we are masters of our fate is an illusion. We can take precautions, consider all available information, and choose prudently, but total control is a chimera.

I decided not to push my luck by driving another three hundred miles and checked into a motel.

“Let us prepare our minds as if we’d come to the very end of life. Let us postpone nothing. Let us balance life’s books each day. . . .The one who puts the finishing touches on their life each day is never short of time.” 


  1. Meditations 2:11 []
  2. The National Safety Council reports that 39,404 people died in the United States in 2018 as a result of motor vehicle accidents. Commercial airline fatalities are extremely rare in the United States. []

The Power of Morning Pages

Productivity should be skyrocketing given the wealth of resources we have at our fingertips that claim to organize and optimize our time. Yet, for some reason, there never seems to be enough time in the day to accomplish all of our objectives. This has given rise to a proliferation of “life hacks” that are supposed to allow us to step back, reset, and refocus on our goals. However, there is no magic bullet that will allow us to get into the state of flow that is needed to accomplish much of anything. Most people spend their days in a constant juggle of context-switching that’s ironically made far worse by the mobile phones that are supposed to make us productive.

My first line of defense against unproductive days has always been a fairly consistent routine that does not vary much from day to day. Knowing what I will be doing and when I will be doing it has helped me focus. However, getting into a state of flow is still difficult at times, especially if there are lingering unresolved issues on my mind. For this reason, I was intrigued when I read about morning pages, a concept created by Julia Cameron that promises to essentially clear away the cobwebs from one’s mind first thing in the morning.

The concept behind morning pages is simple, so simple that it is tempting to dismiss it as a gimmick out of hand. The only rule is that you are supposed to sit down first thing in the morning immediately after waking up and write three pages of longhand, in a stream-of-consciousness style.

That’s it.

There are no rules regarding what you should write about or how long you should spend writing. When the three pages are written, you simply stop and proceed with the rest of your day.

Why is this valuable and how can it help you to be more productive?

There are a number of benefits that I have noted over the ten months that I have been writing morning pages, but first it is important to mention what morning pages are not intended to be. The journal is not necessarily intended to be read in the future by the writer, and certainly is not intended to be read by anyone else. It is not supposed to form the basis for any specific work product, and it is not primarily meant to be a “daily planner”. It is simply a pure stream of consciousness “brain dump” with no agenda whatsoever. In fact, often when I sit down to write, I have no idea what I will be writing until I start. This is the core foundation of the practice: there is no agenda and no expectation other than to write. With that said, the rest of this article outlines some ways in which I have found the practice particularly useful.

The Subconscious Mind

Any mention of the subconscious tends to be met with skepticism but the fact is that much of who we are and how we respond to the world is built on our subconscious mind which is the product of our life experiences. The study of sleep, particularly REM sleep, is a fascinating topic because it quickly becomes apparent that our minds are not merely at rest when we are unconscious. Whether in a dream state that we recall when we wake up or engaged in activity that we never consciously recall, our minds are active while we are at rest.

The practice of morning pages, if done immediately after waking up, makes it possible to write about topics that simply pop into your mind as you have a pen in hand and a blank sheet of paper in front of you. This sounded bizarre to me when I read about it but quickly made sense after just a few days of practice. My habit is to write the date and time down to get started and then often my pen just keeps going as I start to write about various topics that come to mind. By not having an explicit agenda in mind when you sit down to write, you naturally will begin to write about what simply comes to your mind, and what comes to your mind upon waking up is likely in some way related to things that your mind was burdened with while asleep.

By providing a channel for the subconscious mind, morning pages allow these thoughts to have an outlet rather than clattering about in your mind, often subconsciously, as you go about your day. This might sound “deep”, but often the topics are on the mundane side as well. And sometimes, there isn’t really anything that comes to mind at all. In such cases, I typically either write a recap of the prior day or plan out the coming day. Again, there are no rules and no objectives in mind. You just write until the pages are filled and then you stop.

What Was I Thinking?

Although morning pages are not intended to be reviewed in the future, I have found it quite useful to have the ability to refer to a snapshot of my thoughts as I started days that, in retrospect, proved to be consequential ones from a personal or business perspective. For example, I recently wrote an article about common types of irrational behavior when it comes to taxes. One of the examples I used in that article had to do with a mistake I made early this year when I failed to sell a security that I regarded as overvalued because I did not want to incur a taxable capital gain. It turned out that I had actually mentioned this security in a morning pages entry around that time and I could go back and review my state of mind.

If you choose to keep your morning pages entries rather than destroy them, as some practitioners do, you will have other opportunities to review your waking state of mind on days where you made important decisions. If you look back at a specific day and wonder why you made a mistake, you’ll have the ability to see what you thought as you woke up. Were you in a bad mood? Depressed? Exuberant? Optimistic? Perhaps there are lessons to be learned from this exercise. At the same time, it is important to not have this expectation or to make this into a “goal” because we do not want morning pages to become a conscious attempt to document our state of mind. It should always remain a free flowing data dump.

Impromptu Essays

On several occasions, my morning pages entry ended up being an impromptu essay about some topic that I had obviously been thinking about but had not planned to write. In a few cases, this stream of consciousness writing was later adapted for an article on this website. For example, the 75th anniversary of the end of World War II led me to read several books earlier this year just based on personal interest. I had no intention of writing about these books on The Rational Walk. Yet, one morning in May after reading Victor Frankl’s Man’s Search For Meaning, my pen simply started writing an essay that later became the genesis for an article on this website. I did not simply type up my morning pages and post it, of course. But the ideas that came to mind first thing in the morning led me to write that article and to incorporate not only Frankl’s book but William Shirer’s The Rise and Fall of the Third Reich.

In retrospect, why should I be surprised that I chose to write about Frankl’s philosophy or Shirer’s history of Nazi Germany first thing in the morning? After all, I had been reading these books the prior night immediately prior to going to sleep. Did I expect my mind to switch off and no longer think about these haunting topics while I slept? Clearly, these books were being mulled over by my subconscious and, given an outlet, the contents of what I was thinking overnight flowed from my pen to paper. Without morning pages, those thoughts would have been drowned out by the course of the rest of my day.

Take Any Edge You Can Get

The concept of morning pages is extremely simple and costs nothing to try out. If it seems like something you want to pursue, purchasing a high quality notebook is inexpensive and can be aesthetically pleasing. There really isn’t much to lose by sitting down and writing for twenty to thirty minutes every morning.

Some people may be inclined to attempt morning pages on a computer, phone, or tablet instead of paper. This is typically discouraged by morning pages practitioners because part of the goal is to put as little as possible between your thoughts and the written word. If you utilize electronics for morning pages, you risk being immediately distracted by emails, texts, and other notifications before you can even open whatever application you use for writing. Resist the temptation to use electronics.

Morning pages is no panacea. I’ve been following this practice without interruption for ten months and have still experienced plenty of scattered days of poor productivity. However, the percentage of days when I have been able to enter the elusive “flow state” has definitely increased and I would credit morning pages for at least part of that improvement. The fact that I have been able to use morning pages as the basis for a few articles has been an unexpected bonus.

Going the Distance

“What’s the halfway point in a marathon? No, no, no! It’s not 13.1 miles. It’s 20 miles! Slow down!”

— Unknown runner, October 28, 2012, 37th Marine Corps Marathon, around mile two

I had trained for nearly six months, through the oppressive heat and humidity of the Washington D.C. summer and into the coolness of early fall. A longstanding “bucket list” item was finally within reach as I arrived at the starting corral of the pace group aiming for a three hour and thirty minute marathon time. That is the pace I had trained for all summer and, as the cooler fall weather arrived, I found it progressively easier to hit that pace on my long twenty mile training runs. I had this race in the bag, I was sure of it. And looking at many of the other runners aiming for that time, I felt that I was in far better shape.

The Marine Corps Marathon is one of the most popular road races in the United States for good reasons. The scenery of the course is hard to beat, the military organization of the event is meticulous, and it is hard not to be inspired by the soldiers participating in the event, including many disabled veterans. The anticipation of the race plus the adrenaline of waiting at the starting point for well over an hour must have affected everyone. As soon as the starting gun fired, it was off to the races, quite literally.

To run a marathon at a three hour and thirty minute pace implies an average speed of about eight minutes per mile. This was the approximate pace that I had trained for all summer but as the cooler fall weather arrived, I was able to speed up my pace to well under eight minutes per mile on several runs. The adrenaline of the start caused me to speed up and, to my surprise, I crossed the first mile marker in around seven minutes and thirty seconds. The same was true for the second mile, and suddenly I found myself in the midst of the group pacing for a three hour and fifteen minute finish! I was on fire.

But I was out of breath. And I had 24.2 miles to go.

To keep up a pace for a long run like a marathon, you are supposed to be able to hold a conversation while running, not be nearly out of breath. An older runner in the faster pace group asked a question: “What’s the halfway point in a marathon?” I was too out of breath to answer but one of the other runners said, “about thirteen miles”, to which the older guy laughed and said, “Nope, it’s twenty miles! And then you leave it all on the course for the last 10K! You guys need to slow down! You can’t put it in the bank!”

Western culture strongly encourages immediate gratification and this trend has only intensified in recent years as social media makes it nearly impossible to avoid comparing yourself to others. Whether you are looking at a Facebook post of your high school buddy’s around-the-world vacation, your former co-worker’s new $110,000 Tesla Model X with “full self-driving” and ludicrous mode, or admiring photos of your in-laws’ summer home, there is no escape from making comparisons other than to disengage. The irony, of course, is that all of the displays of consumption we see around us are not examples of wealth, but rather the extinguishment of wealth, in most cases with the added assist of debt.

Human beings vary in their competitive nature, but suffice it to say that anyone running in a road race has a healthy sense of the competitive spirit. The adrenaline at the start of a race acts as a supercharger and propels most runners at a faster pace than they intend to run. They are fresh at the starting line and full of energy plus they see other runners, many of whom seem to be in worse shape, passing them. It’s nearly irresistible to try to keep up! The same instinct applies to the manner in which most people make consumption decisions. If you see your peers driving certain types of cars, moving to better neighborhoods, and taking amazing vacations, you will feel an urge ratchet up your lifestyle and do the same. The fleeting pleasure you get from the actual consumption of these items might be less than the sense of self-worth you obtain from “keeping up with the Joneses”.

The race for financial independence is similar to a marathon effort rather than a sprint. By saving money aggressively over the years and investing reasonably well, most people earning the median income or above should be able to retire in comfort. But doing so requires a rejection of the prevailing sprint that most people are running. It requires watching as your peers “pass you” in the race for consuming more and more. That consumption is visible but their lack of savings is not. And lack of savings will never be visible as long as your peers have current income available to continue spending. Having little or no net worth will not limit the consumption of someone who has regular income and the willingness to use debt.

At an annual return of seven percent, your savings would double in roughly one decade. So, what’s the halfway point to retirement for the worker who is 25 years old and intends to retire at 65? In terms of years, the halfway point is at age 45. But in terms of accumulation of assets, it is closer to age 55. Even if the individual stops saving entirely at 55, his savings will double by retirement at age 65 if the annual return is around seven percent.

As Warren Buffett says, you can only tell who has been swimming naked when the tide goes out. All of those peers who have been overspending their income during their working years will eventually end up having to make a massive adjustment to their lifestyles because they will be unable to replicate their working income when they retire. Few jobs include pension plans anymore and social security was never designed to fully replace a worker’s income. Being in a position where you are losing the lifestyle to which you have become accustomed is more painful than never having lived that lifestyle to begin with.

The twenty mile marker was in sight, finally. I had foolishly kept up a much faster than planned pace for the first half of the marathon before I started to feel a little tired and slowed down somewhat. As I passed the U.S. Capitol building and headed back down the mall toward the Washington Monument, my legs began to feel like they weighed several pounds more and this sensation persisted as I ran across the 14th Street bridge back into Virginia. By the twenty mile marker, my pace had slowed to nine minutes per mile, below the average pace I needed to hit my goal. The detour into Crystal City temporarily took me in the opposite direction of the finish line which was mentally difficult and my pace slowed further.

I was in trouble.

Completing the final three miles of the marathon was a surreal experience. Many other runners were in a similar state, with some throwing up by the side of the road and others slowed to a limp. As I shuffled by, barely faster than walking, it occurred to me that the older runner at mile two was right. You can’t “get ahead” when it comes to a marathon. Whatever advantage you gain by running faster than the pace you train for early in the race will be more than offset by the slowdown once you hit “the wall” toward the end. When you run a race at a pace faster than what you trained for, the stored glycogen in your muscles will be prematurely depleted making it physically impossible to keep up the requisite pace, and you’ll be lucky to finish at all.

As I ran uphill toward the finish line at the famous Marine Corps War Memorial, with encouragement from the spectators and the Marines along the final stretch, I somehow tapped a reserve of adrenaline and was able to avoid stumbling into the finish, but just barely. My time came in at three hours and forty minutes, ten minutes slower than my planned time. All of the advantage of running faster than my capabilities allowed at the beginning of the race was more than offset by the disadvantage at the end, to say nothing of the needless discomfort the decision created!

When it comes to making consumption decisions or selecting investments, there is a temptation to want to see results right now. Most people are driven to see quick results and their self-esteem depends on it, but more importantly, they care deeply about comparing themselves to others. Whether you are running a marathon, investing, or deciding on how much to consume versus save, the only way to succeed is to ignore the crowd and stick to your plan. Taking shortcuts will make it harder to reach your ultimate goal.

I have raced in six additional marathons since that day in the fall of 2012 and I achieved a personal record of 3:27:36 in the spring of 2014. When I was invariably passed by many runners early in the race, I just thought to myself, “I’ll see you later”, and in many cases I ended up passing people who had started out too quickly.

A runner can compete in dozens of marathons in his or her life. Mistakes in financial planning can be less forgiving. The person who awakens to a lack of financial security at age 50 or 55 simply has very little time to correct course. To go the full distance, starting early is a major advantage. Don’t let people passing you on the consumption train bother you. You will likely be passing them later.

Deprival-Superreaction Tendency

“‘Tis better to have loved and lost 
Than never to have loved at all. 

Alfred, Lord Tennyson

The pursuit of worldly wisdom requires us to understand the human psychology that drives decision making and behavior. What may appear to be undeniably rational and optimal from a purely logical standpoint often fails to account for the fact that human beings do not view the world in the same way as a computer. Thousands of years of evolution have left humanity with a set of psychological impulses that might have been necessary to ensure the perpetuation of the species centuries ago but can lead to miscalculations in the modern world. While we should acknowledge that all of us are subject to the legacy of evolutionary psychology, by understanding common areas of misjudgment we may be able to give ourselves a slight edge.

Was Lord Tennyson correct? It certainly seems like his poem contains a great deal of wisdom. Surely it is better if one has strong connections with other human beings even if circumstances change that later deprive us of those relationships. It is inevitable that anyone going through life will suffer loss, whether it might be due to a break-up of a relationship, the death of a romantic partner, or the loss of a friend or close relative. Loss in a social context can also occur when economic dislocations cause us to lose contact with colleagues even when they might not be close personal friends. The only way to guarantee that one suffers no loss is to become a hermit and avoid interacting with anyone. Almost all human beings are social creatures and the cost of avoiding the risk of social loss — a lifetime of isolation — clearly exceeds the cost of dealing with the losses that will inevitably occur.

While Lord Tennyson’s perceptions regarding human relationships seems to match practical experience, his words cannot be applied when it comes to human emotions related to economics.

From a practical perspective, in the way a computer might regard well-being, it certainly seems like the happiness of an individual who experiences transient wealth might be greater than someone who never experienced wealth at all. Consider two neighbors who both earn the median household income. One individual wins a $10 million lottery but, within a few years, manages to squander half of it through frivolous spending and loses the other half in bad investments. From an economic standpoint, the lottery winner enjoys higher lifetime consumption than the person who never won the lottery, but from a psychological standpoint, the lottery winner is far worse off. His higher lifetime consumption, boosted in a fleeting manner, is no consolation for losing what he became accustomed to.

The lottery winner, for a brief period of time, is relieved of any financial worries, has no need to work, and can finally acquire most of the possessions he has ever dreamed about. His lifestyle immediately ratchets up to the limits of his newfound wealth which provides temporary joy, but the hedonic treadmill soon causes him to regard all of this as the new baseline. Soon, half of his winnings have been consumed and the rest of it evaporates due to poor investments. Does anyone intuitively think that this man will go back to his old neighborhood, get a job working at the median income, and be satisfied with his life? In contrast, his neighbor who never won the lottery has continued living his life — not necessarily satisfied with everything and perhaps always aspiring for more, but at least not having tasted what he can no longer have.

Starting in the 1990s, Charlie Munger began to give public talks about his framework of human misjudgment which was later significantly expanded in written form as a chapter in Poor Charlie’s Almanack. Deprival-Superreaction Tendency refers to the human reactions to the experience of loss — both the loss of something one already possesses as well as the loss of something that one has almost obtained. Munger likens the human reaction to loss to the reaction of his dog when someone tried to take food out of his mouth. The dog, normally tame and good natured, would bite his master. This was a totally irrational act but an instinctive and automatic reaction to loss.

In 2011, Daniel Kahneman published Thinking, Fast and Slow, a book that describes prospect theory and many additional topics in a format intended for a non-academic audience.  Through a series of experiments and surveys, Kahneman demonstrates that individuals feel the benefits of gains much less forcefully than the pain of losses. Consider the exhibit below:

Charlie Munger’s dog felt the pain of loss much more than the pleasure of gain in terms of a food reward just as the lottery winner feels the loss of his fortune much more intensely than the pleasure of his win.

There are many other contexts in which the deprival-superreaction tendency can influence decision making as well as government policy. One excellent example is the psychology behind payroll tax withholdings. In the United States, as well as in most developed countries, it is mandatory to have an estimate of a worker’s tax liability deducted from each paycheck before the worker ever sees the funds. If a worker’s gross pay is $10,000 per month, she might only see $7,000 deposited into her bank account at the end of the month because $3,000 has already been claimed for payroll taxes as well as federal and state income taxes. Additionally, many people voluntarily authorize deductions for retirement contributions.

What would happen if the gross amount of the worker’s pay of $10,000 was deposited in her account and she wrote checks totaling $3,000 to the various government agencies as well as to her retirement account provider? The answer, for almost everyone, is that she would feel worse off than if she had never seen the $3,000 hit her account to begin with. One might think that she feels worse off because of the hassle of having to write checks, but the same would be true if the payments were automated. Merely seeing her account balance go up by $10,000 and having $3,000 taken from the account makes her feel worse than if she simply had the $7,000 net pay deposited and never consciously thought about the withheld taxes.

Of course, the irrationality gets even worse when people willingly have excess funds withheld from their paychecks in order to get a tax refund the following April. However, from a psychological standpoint, the extra withholding doesn’t sting very much because it is not money the worker ever “had” to begin with, and the windfall refund is like manna from heaven. Almost everyone understands that this isn’t free money from an intellectual standpoint, but for some reason people still enjoy getting tax refunds so much that they willingly provide an interest free loan to the government through excessive payroll withholdings.

Charlie Munger also notes that deprival-superreaction has important implications for labor-relations. Whether in the form of union contracts or discussions with individuals regarding their pay package, it is nearly impossible for employers to reduce wages even when necessary and warranted. Even in cases where a business has an unsustainable cost structure and failure to reduce wages would result in an elimination of all jobs, and even in industries where employees may have trouble finding new work, it is not uncommon for unions to reject pay cuts. In such cases, a business failure would leave both the owners of the business and the employees in worse shape than if employees made a difficult decision to accept lower wages.

The difficulty of wages and prices to adjust downward due to the deprival-superreaction tendency is one reason the government policy seeks to leverage the concept of money illusion through inflation. Aside from economies suffering from hyperinflation, people think of wages and prices in nominal terms. An employer that needs to cut wages by two percent in real terms will have a much easier time implementing a pay freeze in a year when inflation is two percent than trying to impose a two percent pay cut in a year when there is no inflation. The need to allow real prices and wages to adjust downward, when warranted, is one of the more compelling arguments in favor of low levels of inflation (as opposed to zero inflation), although it is questionable whether it is ethical for government to harness money illusion as a policy tool in this manner.

It is tempting to consider issues like this and pretend that we have immunity because we understand the issues at an intellectual level. The reality is that no one is immune but we are capable of incrementally acting in a more rational manner by going through checklists and being aware of the biases that could be influencing our decisions. I still feel the pain of permanent losses of capital much more acutely than the pleasure of gains. But I have never sought to artificially receive tax refunds every April by overpaying during the prior year. I will take that as a small victory.

Note to readers: This article is part of a series on Charlie Munger’s Psychology of Human Misjudgment.


Forgot Password?

Join Us

Password Reset
Please enter your e-mail address. You will receive a new password via e-mail.