Book Summary #7: The Psychology of Money by Morgan Housel

Delve into the human side of finance

I read “The Psychology of Money” immediately after finishing “Rich Dad Poor Dad” on my brother’s recommendation.

Rich Dad Poor Dad: Robert Kiyosaki emphasizes the importance of financial education, entrepreneurial thinking, and investing in income-generating assets like real estate and businesses to achieve financial independence. Here are some enduring takeaways from the book.

The Psychology of Money: Morgan Housel delves into the behavioural and psychological aspects of money management, highlighting the role of emotions, biases, and long-term thinking in financial success.

Combining the lessons from both books gave me distinct perspectives on personal finance. I realized the significance of not only acquiring financial knowledge but also managing emotions and behaviours around money.

About the author

Morgan Housel is a financial writer and analyst with a background in economics and behavioural finance. “The Psychology of Money” a bestselling book that has sold over 3 million copies and translated into 53 languages. The count is still on! His writings have made a significant impact in helping individuals better understand the human side of finance.

Book Summary

Here is a chapter-wise journey to uncover the wisdom encapsulated within this remarkable book.

1. No One’s Crazy

Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.

Financial decisions often seem irrational to others, but they make perfect sense to the person making them. It explores how people’s unique backgrounds and experiences shape their financial behaviour.

• “There is no one right way to do things, only the most right way for you.”
• “Wealth is just the accumulated leftovers after you spend what you take in.”
• “Understanding what makes people tick is the first step toward a more rational financial future.”
• “Money isn’t just a store of value; it’s a store of experience.”
• “The hardest financial skill is getting the goalpost to stop moving.”

2. Luck & Risk

Nothing is as good or as bad as it seems.

Role of luck is important in making decisions with a margin of safety.

Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune if you make a few big bets and are right on those because a small minority of things account for the majority of outcomes.

• “Risk, as it turns out, is a double-edged sword.”
• “Wealth is what you don’t see — the cars not purchased, the cash not spent, the investments not made.”
• “Avoiding ruin is often more important than striving for maximum returns.”
• “The seduction of pessimism is that by telling yourself you can’t do anything big, you’re excused from having to try.”

3. Never Enough

People’s desires and ambitions constantly evolve. It discusses the importance of defining what “enough” means for you.

• “The hardest financial skill is getting the goalpost to stop moving.”
• “Saving is a gap between your ego and your income.”
• “Money buys freedom, but freedom doesn’t create money.”
• “Contentment is a form of wealth.”

4. Confounding Compounding

This chapter highlights how small, consistent actions can lead to significant results over time.

• “Time is the most powerful component of wealth.”
• “Getting wealthy is not a battle of the best returns; it’s a battle of staying in the game.”
• “The single most important variable in accumulating wealth is getting out of your own way.”
• “The more control you have over your time, the more valuable it is.”

5. Getting Wealth vs Staying Wealthy

Good investing is not necessarily about making good decisions. It’s about consistently not screwing up. This chapter discusses the challenges people face in preserving their wealth once they have acquired it, emphasizing the importance of avoiding destructive behaviours.

• “Wealth is just the accumulated surplus of cash you didn’t spend.”
• “Money is a story that people in the past agreed to tell each other, and those stories can change.”
• “Reaching financial success requires taking some risk, but the real key is not to lose what you’ve made.”

6. Tails, You Win

Rare and extreme events (known as ‘tails’) have a disproportionate impact on our financial lives. Being prepared for unexpected events is extremely important. You can be wrong half the time but still make a fortune.

• “Most of us experience a few extreme events that determine the course of our financial lives.”
• “The most important thing is to be able to survive the randomness of life long enough for your good ideas to pay off.”
• “You don’t have to be the best. You just have to be good enough, for long enough, and with a few meaningful opportunities.”

7. Freedom

Financial freedom is often misunderstood. The chapter discusses the trade-offs between freedom and security in financial decision-making. Controlling your time is the highest dividend money pays.

• “Financial assets buy options, and that is what we are all looking for — options to do what we want when we want.”
• “The freedom to do what you want, when you want, with who you want, for as long as you want, is priceless.”

8. Man in the Car Paradox

People often make financial decisions that prioritize appearances over financial well-being. Social comparison can lead to financial insecurity. No one is impressed with your possessions as much as you are.

• “There’s no easier way to separate yourself from your money than to underestimate how easy it is to spend when you have it.”
• “The danger of keeping up with the Joneses is that you might destroy your chance to get rich.”
• “The highest returns don’t require making the right predictions; they require minimizing the amount of wrong ones.”

9. Wealth is What You Don’t See

True wealth is often hidden from view. People can appear wealthy but be financially insecure, and vice versa. Spending money to show people how much money you have is the fastest way to have less money.

• “Wealth is largely invisible. It’s the money not spent.”
• “The problem with wealth is that it’s a double-sided coin. You can’t truly know how much someone else is worth just by appearances.”
• “The most important financial skill is getting the goalpost to stop moving.”
• “The secret to accumulating wealth is living below your means.”

10. Save Money

Make saving money a habit. It is a fundamental aspect of financial well-being.

• “Building wealth has little to do with your income or investment returns, and lots to do with your saving rate.”
• “Money can buy many things, but nothing quite as valuable as your financial freedom.”
• “Saving is the gap between your ego and your income.”
• “Being able to save is a talent, and it needs to be developed like any other skill.”
• “Savings without purpose is just money waiting to be spent.”

11. Reasonable Rational

Investors sometimes behave irrationally and their emotions drive their financial decision-making. It advocates for a more rational and disciplined approach to investing.

• “Investing is not the study of finance. It’s the study of how people behave with money.”
• “Being an above-average investor is about mastering the mundane (ordinary).”
• “The stock market is a psychological experiment.”
• “Good investing is not necessarily about earning the highest returns; it’s about earning pretty good returns that you can stick with.”

12. Surprise

Surprises are inevitable in life. It is important to be prepared for its unexpected impact on finances. History is the study of change, ironically used as a map of the future.

• “The more frequently you update your expectations, the more vulnerable you are to being whipsawed by surprises.”
• “You can’t control surprises, but you can control how you prepare for them.”

13. Room For Error

It is important to leave room for error and not take excessive risks.

Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

• “A margin of safety is about knowing what you don’t know and can’t forecast.”
• “A great goal in life is to minimize the chances of ruin.”
• “Don’t confuse education with schooling.”
• “The greatest teacher of all is doing.”

14. You’ll Change

Long term planning is harder than it seems because people’s goals and desires change over time. So, there is a need for financial flexibility and adaptability.

• “The only financial plan that matters is the one that helps you sleep at night.”
• “Life is a series of snap decisions.”
• “The best financial plan is the one you can stick with.”

15. Nothing’s Free

Everything has a price but not all prices appear on labels. There are no free lunches in finance and that every financial decision comes with trade-offs.

• “Risk is what you don’t see.”
• “The hardest financial skill is getting the goalpost to stop moving.”
• “There’s a price to be paid for financial peace of mind, and it’s worth every penny.”

16. You And Me

Societal and cultural factors influences financial behaviour. Our environment shapes our financial decisions.

Beware taking financial cues from people playing a different game than you are. make sure your actions are not being influenced by people playing a different game.

• “Wealth is what you don’t see. It is the nice cars not purchased. The diamonds not bought.”
• “When you’re young, you compete against other people. When you’re old, you compete against your younger self.”

17. The Seduction of Pessimism

Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you. Pessimism can lead people to make poor financial decisions. It advocates for a more balanced and realistic outlook.

• “The danger of keeping up with the Joneses is that you might destroy your chance to get rich.”
• “Pessimism is an addiction, and the news is the drug.”
• “The stock market is a device for transferring money from the impatient to the patient.”
• “To build wealth, you must preserve capital, reduce taxes, and save a lot. Everything else is secondary.”

Progress happens too slowly to notice, but setback happens too quickly to ignore.

18. When You’ll Believe Anything

Appealing fictions, and why stories are more powerful than statistics. This chapter discusses the influence of narratives and stories on financial decision-making.

• “There is no substitute for thinking for yourself.”
• “The seduction of pessimism is that by telling yourself you can’t do anything big, you’re excused from having to try.”

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.

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

19. All Together Now

Collaboration and cooperationis very important in achieving financial goals. Relationships have a big role in financial success.

Being good with money means nothing if you’re not good with people.

• “No amount of money will solve every problem. But many problems can be solved with money.”
• “The most valuable part of a network is being able to learn and grow with other people.”
• “Money can be the result of a great life, but a great life is not the result of money.”

20. Confessions

A candid look at personal finance and the author’s journey…

• “The definition of success is different for everyone, but the formula for success is the same for everyone: It’s the ability to choose the life you want.”
• “The irony of good investing is that it’s not about investing. It’s about setting goals and being patient.”
• “Financial success is not about getting rich quick. It’s about getting rich slowly and staying that way.”

The best investment you can make is an investment in yourself.

My take…

The book made me realize that managing money isn’t just about numbers and investments; it’s also about managing our emotions and behaviors surrounding money.

From the importance of recognizing the role of luck, distinguishing between getting wealthy and staying wealthy, embracing the power of optimism & rejecting the seduction of pessimism to the value of defining “enough” for oneself, these lessons have resonated deeply with me.

Housel’s wisdom isn’t just enlightening; it’s also highly applicable. I’ve seen real-life examples of these principles at play among my friends and family as I grew up, reinforcing their validity. I hope that you, too, find these insights valuable in your own financial journey, as I have in mine.