Lab Summaries - Psychology of Crypto

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Morgan Housel is a household name in the personal finance space, best known as the author of ‘The Psychology of Money’.

While he does not hold any crypto investments, it was refreshing to see him on the Bankless podcast.

In the interview, he shares his views of crypto as an industry, and how various types of psychology and mindsets are relevant not only for crypto, but for investing in general.

This is a long 80 min podcast that dived deep into many different lessons an investor can find relevant and take away from.

Here’s a summary of key insights I found most useful, and I hope you do too.

My main takeaway? Good investing is all about good psychology.

What it takes to be a successful investor

Many human behaviors with respect to financial assets never change over time; Crypto is not special and no different.

Investing is not solely dependent on skill. Successful investing is mostly about good psychology - based on patience and not becoming irrational during bouts of greed and fear.

On investing in crypto as an industry

All new industries go through ‘absurd’ phases, with over 90% of the industry failing. This is what crypto is going through right now, with all the rugs, hacks and everything in between.

But this is the normal funnel of new innovation: People try a thousand things, and almost all don't work. But those that work end up changing the world.

On volatility in investing

Volatility in crypto is the price of admission for outsized gains. There is no free lunch, potential outsized rewards come with a ‘ticket cost’.

If we expect outsized gains, we should understand that it comes with outsized volatility. For example: Netflix, with a 600X gain since 2002, saw multiple 70% drawdowns.

Managing volatility and self-awareness

Be introspective and better understand who you are as an investor - then manage risk accordingly. The best way to then know your risk appetite is how you cope and behave when you face a calamity, not in bull markets.

Be honest with who you are, not chase someone you want to be, and be comfortable with that.

No one is crazy with how they choose to invest

Everyone comes from different perspectives and experiences: This results in different risk tolerances, time horizons, etc..

This naturally makes everyone's investment philosophy different, there's no need to judge.

It's never as good or as bad as it seems

Risk and luck are the same but in different directions. We cannot replicate others' luck, as these are external factors we have no control over.

We can emulate specific actions from people we admire (e.g. thought processes and behaviours), but we cannot emulate one’s luck.

Survivorship bias is a strong factor in life that we need to be aware of.

We don't truly understand the power of compounding

We are not wired to understand exponential growth.

Compounding can come in the form of putting in time, growing money and improving skills. These have an exponential impact that most people are unable to visualise.

Compounding is the most powerful force in investing, but is so easy to underestimate.

Getting rich vs staying rich

Getting rich vs staying rich are conflicting skills.

Best people who have done well over time learn how to get these skills to coexist.

We need to have a barbell personality: Saving money like a pessimist, investing money like an optimist.

Many successful people (e.g. Warren Buffet, Charlie Munger) got rich because they were not in a hurry. Many who are in a hurry get flushed out.

Being reasonable is better than better rational in investing

Humans are not fully rational, we are emotional creatures. We dont always make financial decisions fully analysed on a spreadsheet.

Some actions we do cannot be explained on a spreadsheet, but makes sense emotionally and help us sleep better at night.

The best we can expect from ourselves and others is reasonable behaviour, not fully rational ones.

On pessimism

Bad news tends to spread very fast, while good news is slowly compounded over time.

Pessimism sounds smarter, sounds like helpful tips/ideas. Whereas optimism can often sound to people like selling.

But pessimism is more often wrong than is right. Be optimistic long-term.

What is freedom to you?

What makes us happy is not necessarily material wealth, but being independent and having control over our lives.

Money is best used as a tool to gain independence, but not for status or virtue signalling.

With money, we have the freedom to slowly stop doing things we don't like and live the way we want.

Have enough

Be happy with having enough. Don't have your expectations grow faster than your income.

Enjoyed this summary?

You can catch the full interview with Bankless here.

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