Fisher Investments Book Review: Money ’Magination

Before you worry over the dollar, fret over the yen or panic about the euro, forget all that stuff and ask if you really believe you understand prices—just prices—at all. I’ll bet you don’t; I don’t even think I do.

Take these two books:

The Price of Everything: Solving the Mystery of Why We Pay What We Do– Eduardo Porter

Priceless: The Myth of Fair Value (and How to Take Advantage of It)– William Poundstone

If you’re looking for good primers on behavioral psychology, these are great--especially Poundstone’s. But they don’t actually explain what prices are, why they exist or how they really work. These books do the same thing most all behavioral finance does: Tell you what something isn’t. They debunk all sorts of classical theories on how things are priced but don’t spend any time telling you what prices really are. And that’s ok!

Just think of all prices do. They’re perhaps the greatest innovation ever in terms of transmitting information. Potentially millions or billions of opinions represented in a single data point. You can contemplate prices almost forever and never truly grasp all of how they work.

Don’t worry, we won’t attempt to understand it all in this brief review. But let’s do contemplate a few fun things likely to freak you out about prices and money generally.

Here’s a weird one: Psychological things are facts. A thought is a fact. Not to get all Cartesian on you, but thoughts are real, they just aren’t tangible. Ideas move the world. That’s precisely how to think of money. Money, first and foremost, is an idea. It doesn’t exist without our minds. That we tend to take prices as a given—almost part of the fabric of reality—is just another sign of how potent ideas can be and how closely wired all our heads really are across the globe and through time. Money is so staggeringly powerful and useful an idea it only seems tangible. It is not. If we all one day decide money doesn’t exist, it stops existing. You might say, “Nonsense! Gold can be money. Gold is tangible!” No way. Gold is just a thing that we attach the idea of money to. Gold, without our psychology of value layered upon it, does mostly nothing in and of itself.

We really don’t want to believe in our heart of hearts that’s true. We fear the “squishyness” of that. But the simple reality is half of every transaction involving a good or service is based on psychology. Many in this industry abhor what I just said or ignore it wholesale mostly because they want to believe their work is more “tangible” than “mere” psychology. Also, folks tend to get terrified of this discussion because—gulp—how could my whole life, all that I’ve saved, the foundation of our livelihoods (and civilization!) be based on stuff that only exists in the mind? Scary stuff! But it’s really no different than government and law—those are all ideas we base our worlds and behaviors on. (Specifically, stable property rights and accepted “rules” of money we all generally adhere to are part of what make money possible. Note that through history, as soon as property rights and the rules of money start getting fudged with, there will virtually always be hiccups in prices of things. And maybe a war or two.)

And anyway, I’m personally quite comfortable with money as ethereal. Aside from the seasons and the sun, there are few things in the world more stable than collective human psychology. People think too much of the ups and downs of bull and bear markets as evidence of the whims of the psyche, but most core features of money are profoundly stable through time and place. Money is a concept basically every coherent person on earth can grasp. We all “get” it. (Isn’t that simply fascinating?)

So when it comes to prices (facilitated by types of money), there is absolutely nothing in the cosmos that has an intrinsic value outside our minds. There is no “real” value of anything to be glommed on to or found, calculated, what have you. Prices are psychologies. We’ve created math, formalized theory, laws and countless rules all over the place to try and bridge this divide, to place some order to it—but prices ultimately hinge on our ability to believe in them.

One way to really understand all this is to think of some post-apocalyptic sci-fi story like Mad Max. Government and its rules (property rights, for instance) are gone in this world, and so money is basically gone too—it’s back to bartering or warring for gasoline and food.

Maybe we can say this differently: Think of the difference between the concept of value (which is subjective) and fact (which is objective). Which of those best describes stock prices do you think?

Now come back to reality, but bring these views with you. The perspective of money as psychology will help you think through much of today’s turmoil—how is it that the Federal Reserve can just “create” money? How can the EU just keep changing the rules of sovereign debt until somehow Greece avoids default (for now)? It’s because they’re playing with the rules of money--that is, the ideas of money in ways that mostly preserve the public’s faith and belief (never a fait accompli in my book).

Also, there’s no need to throw out all economics or finance or accounting. Those things are potent ideas too—and in a world where we broadly adhere to them, they matter and also influence prices and how people behave. So don’t forget all you’ve learned. But you’ll do good to keep that baseline psychological view of money in the back of your head.