Book Summary: The Psychology of Money
Everyone talks about money, but not many people get it like Morgan Housel does. In this summary, we break down some key concepts from his recent bestseller, The Psychology of Money.
Why do good degrees, great networks, and qualifications guarantee success in some fields, but not always when it comes to making money?
Finance is regulated by human decisions and not the laws of nature. Human decisions in turn arise from behaviour and psychology. An airplane crash can be explained with physics and equipment. But there is no barometer which explains a financial crisis. That’s because a lot about our financial condition can be explained not by interest rates and equations, but insecurity, greed, and risk.
Everybody looks at money differently. At a basic level, it starts from one’s nature, gets shaped by upbringing, and refined by events. A person who grew up during a market crash would view risk differently than one who grew in a boom. Equally smart people can disagree.
An often overlooked fact is that the financial system we all operate in is pretty new — so we’re all a bit crazy. We make decisions based on our own unique experiences which make sense to us in a given moment.
A roll of the dice
Never discount the role chance plays. Even the most well thought out decisions can head straight into a dead end. And an irrational option may turn out to be a jackpot.
In its two forms — luck and risk — chance has the power to override any individual effort.
Imagine if Bill Gates didn’t have a computer to work on in his high school? The world as we know it might look very different. The threads of causality work invisibly and powerfully. They’re far too complex to allow 100% of your actions to cause 100% of outcomes.
How did X become rich and Y go bankrupt? How should I invest?
A wise person will always include a factor of luck in the answer to all these questions. We may never be able to tell how much of one’s effort will lead to the desired outcome. But we can prepare.
Preparation starts with choosing role models carefully. Any one of their decisions could have been their downfall, but they made a pattern of successful decisions.
Focus on the pattern more than the person. Always consider your life situation when listening to advice.
What is your relationship with money?
Money is a conduit — not an end state. Money just for the sake of more makes one susceptible to fall into a pit of greed. There is no reason to risk what you have and need for what you don’t have and don’t need. Don’t let envy guide your needs.
Enough doesn’t mean ‘less’. It doesn’t mean that you should stop striving for more and better things in life. It simply means that you should know where your goal post is. As you change and grow in your life, the goalpost changes too.
The human brain thinks linearly so whenever it sees compounded values, it cannot comprehend it. Good investing isn’t about the highest return but earning good enough to keep the cycle moving.
Consider tennis. Many top players become world number 1s. But in modern history, there have only been 3 players who have consistently won.
Wealth is similar. There are many ways of getting wealthy but staying wealthy requires a combination of restraint and uncertainty.
Surviving long enough in the game of luck to make the best use of compounding is vital. Survival instincts are honed by continually considering uncertainty.
Nothing is promised; neither success nor failure. Be optimistic about the future and wary of what stops it.
In real life, outcomes are distributed with different weights. Think of the one-hit wonders. One portfolio good call or one bad one could be the difference between wealth and bankruptcy.
Do the average thing when everybody else is going mad.
The slow and steady tail-enders are the primary drivers of your growth. Pay attention to them and you have enough to fall back on. For every uncertainty you venture into, you build yourself a wall of certain and calm growth.
Work towards wealth
There are things in life money cannot put a price on. The quality of relationships and the control of time. Align money towards a life that lets you do what you want, when you want, with whom you want, where you want, for as long as you want. That’s what counts.
People want wealth to show people that they are admirable and likable, but the twist here is that when the people look at your wealth they just use it as a benchmark to make themselves likable.
Always have a clear goalpost. Who is it that you want to be wealthy for?
When people strive to become millionaires, is their aim to *spend* a million dollars or *have* a million dollars? The key to becoming rich is not to spend money, it is in not spending money you don’t have.
One can see if a person is rich, but wealth is hidden.
Taxes. Interest rates. Loan rates. These are things no one has control over. What one does control is their savings rate. The rate of saving matters more than your income when it comes to building wealth. And the best part? Value of wealth is relative to what YOU need.
Managing wealth requires many soft skills. One of them is understanding that it is more important to be reasonable than rational. You’re not a machine. You’re human. While making decisions, don’t discount your emotions completely. Investing is not hard science. It’s a group of people making imperfect decisions with little information about things that have a big impact on their well-being. It can even make smart people nervous, greedy, and paranoid. Understand history, it's an analysis of causality.
People change a lot over their lifetimes and so will you. Your goals and desires are never going to stop being dynamic. Accommodate yourself in the equation of long term planning.
Avoid all the extremes to end up with the least regrets.
Nothing in this world is indeed free, if you’re not giving up in terms of money then you are in terms of something else. Time, oxygen, comfort, happiness. In every interaction, be mindful of what you give and what you get.
Optimism and pessimism can both leave pretty heavy perceptions. Pessimism can lead you to exaggerate trends into the present without accounting for changes. Be careful and consider logic and probability. The more you want something to be true, the more likely you are to buy into a story that promises it to be true. We love and crave narratives. We even use them to fill real-life gaps.
Never overlook statistics in favour of narratives.
And that’s a wrap on Morgan Housel’s Psychology Of Money! We’d love to know which of these insights resonated most with you. If you want to discuss your insights with our book club, join our Discord server.
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