The Psychology of Money by Morgan Housel

The Psychology of Money is about the strange ways people think about wealth, greed, and happiness.

What Is The Psychology of Money About?

  • The Psychology of Money is about the strange ways people think about wealth, greed, and happiness.

The Psychology of Money Summary

1. No One’s Crazy

Summary: Everyone looks at money through the lens of their past experiences.

You can read what it was like to lose everything during, say, The Great Recession, but you will never bear the emotional scars of those who survived it and are now afraid to invest again. It’s important to remember, then, that until you’ve lived through a financial crisis and felt its consequences, you will never understand why people behave the way they do. 

2. Luck & Risk

Big idea: Nothing is as good or as bad as it seems.

Every outcome in life is guided by forces other than individual effort. Bill Gates had a competitive advantage over millions of other students because he attended one of the only high schools in the world that had the cash and foresight to buy a computer. In finance, luck is as much a force as risk.

3. Never Enough

Big idea: Rich people do crazy things.

Rajat Guptas. Bernie Madoff. These are men that had everything— wealth, power, freedom—only to lost everything because they had no sense of enough. The lesson? There is no need to risk what you have and need for what you don’t have and don’t need. The hardest financial skill, it seems, is to stop the goalposts from moving.  

4. Confounding Compounding

Big Idea: Our minds are not built to handle the reality that compounding leads to logic-defying results.

Warren Buffett’s fortune isn’t due to just being a good investor. Rather it’s due to being a good investor since he was a child. As of writing, Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. The counterintuitive nature of compounding leads even the smartest of us to overlook its enormous power.

5. Getting Wealthy vs. Staying Wealthy

Big idea: Good investing is not about making good decisions. It’s about consistently not screwing up.

Housel writes that if he had to summarize money success in a single word, it would be “survival.” Not “growth” or “brains” or “insight,” but “survival.” The ability to stick around for a long time, without wiping out or being forced to give up, makes the biggest difference when it comes to making money. Compounding only works if you can give an asset years to grow.

6. Tails, You Win

Big idea: You can be wrong half the time and still make a fortune.

“Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.”

7. Freedom

Big idea: Controlling your time is the highest dividend money pays.

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want, when I want, with who I want, for as long as I want.” This, more than your salary, more than the size of your hours, more than the prestige of your job, more than anything, is the highest dividend money pays. 

8. Man in the Car Paradox

Big idea: No one is impressed with your possessions as much as you are.

People tend to want wealth to signal to others that they want to be liked and admired. But in reality, those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.

9. Wealth is What You Don’t See

Big idea: Spending money to show people how much money you have is the fastest way to have less money.

We tend to judge wealth by what we see because that’s the information we have in front of us. But the truth is that wealth is what you don’t see. Rich is a current income. Nice cars purchased. Diamonds bought. But wealth is hidden. It is an option not yet taken to buy something later. Not knowing the difference is a source of countless poor money decisions. 

10. Save Money

Big idea: The only factor you can control generates one of the only things that matters.

Building wealth has little to do with your income or investment returns and more to do with your savings rate. More importantly, the value of wealth is relative to what you need. A high savings rate means having lower expenses than you otherwise could and having lower expenses means your savings go farther than they would if you spent more.

11. Reasonable > Rational

Big idea: Aiming to be mostly reasonable works better than trying to be coldly rational.

“Do not aim to be coldly rational when making financial decisions,” writes Housel. “Aim to just be pretty reasonable. Reasonable is more realistic, and you have a better chance of sticking with it for the long run, which is what matters most when managing money.” You’re not a spreadsheet, remember. You’re a person.

12. Surprise!

Big idea: History is an unassailable guide to the future.

A trap many investors fall into is what Housel calls, “historians as prophets” fallacy: an overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress. Past performance is not indicative of future results—the world changes.

13. Room for Error

Big idea: The most important part of every plan is planning on your plan not going according to plan.

Use room for error when estimating your future returns. For his own investments, Housel assumes the future returns he’ll earn in his lifetime will be ⅓ lower than the historic average. So, he saves more than he would if I assumed the future will resemble the past. It’s his margin of safety.

14. You’ll Change

Big idea: Long-term planning is harder than it seems because people’s goals and desires change over time.

We’re such poor forecasters of our future selves that’s there’s a term for this phenomenon: The End of History Illusion. We’re aware of how much we’ve changed in the past, but we grossly underestimate how much our personalities, desires, and goal will change in the future.

Housel writes, “Imagining a goal is easy and fun. Imagining a goal in the context of the realistic life stresses that grow with competitive pursuits is something entirely different.” When you’re making long-term decisions, then, remember to avoid the extreme ends of financial planning and accept the reality of changing your mind.

15. Nothing’s Free

Big idea: Everything has a price, but not all prices appear on labels.

The price of investing success is not immediately obvious. It’s not a price tag you can see, so when the bill comes due, it doesn’t feel like a fee for getting something good. It feels like a fee for doing something wrong. Housel writes, “Thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.” 

16. You & Me

Big idea: Avoid taking financial cues from people playing at a different game than you are.

Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games that you are. Go out of your way to identify what game you’re playing and ignore the rest.

17. The Seduction of Pessimism

Big idea: Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.

In finance, pessimism is paid more attention than optimism, and is, therefore, more persuasive. “It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent,” writes Housel. “Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together.” True financial optimism, Housel posits, is to expect things to be bad and be surprised when they’re not.

18. When You’ll Believe Anything

Big idea: Stories trump statistics.

The more you want something to be true, the more likely you are going to believe a story that overestimates the odds of it being true. After World War I ended, for instance, few thought there would ever be another world war. Housel writes there are many things in life that we think are true because we desperately want them to be true. He calls these things “appealing fictions,” and they have a big impact on how we think about money—particularly investments and the economy. 

Other Notes

  • “Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.”
  • Wealth is created by suppressing what you could buy today in order to have more options in the future.
  • “Manage your money in a way that helps you sleep at night.”
  • “If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.”
  • “Become okay with a lot of things going wrong. You can be wrong half the time and still make a fortune.”
  • “Use money to gain control over your time.”
  • “No one is impressed with your possessions as much as you are.”
  • You don’t need a specific reason to save.
  • Uncertainty, about, and regret are invisible costs worth paying.
  • Your goals and desires will change over time.
  • Learn to love risk, but be paranoid of ruinous risk. The former pays off over time. The latter prevents you from taking future risks that pay off over time. 
  • Avoid being influence by people playing a different game to you.
  • There is no single right answer in finance, just the answer that works for you.

Read Full story here: Sam Thomas Davies

Do Incredible, Administrator 19 March 2023
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