The Psychology of Money

Timeless lessons on wealth, greed, and happiness

by Morgan Housel

183 pages, ★★★★★
Finished on 26th of February, buy here.

🚀 The Book in 3 Sentences

  1. Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. The value of wealth is relative to what you need. Desire less, spend less, care less about what others think of you.
  2. Everything about money is just playing the odds. There is no certainty, ever. You can only do the best according to the knowledge you currently have and acknowledge that you only know a very small percentage of what you would need to know in order to make the best possible decisions.
  3. Expensive things like fancy cars and houses never make sense. Not even for showing off, because people won’t admire you, they’ll admire the stuff.

🎨 Impressions

This is a book I wish existed when I was 18 years old. Lots of useful information crammed into a tiny amount of pages – less than 200. It’s helpful to know that in order to make smart money decisions, you should try to be on top of things, but not too hard, because everything is unforeseeable. Not even the experts have any idea when a recession is about to hit. Most of it all, you need to stay humble, pay yourself first (i.e. save money for unforeseen events), don’t follow an extravagant lifestyle, and accept that a lot of it is just luck. Play the long game. It’s a bet on humanity improving the world.

🍀 How the Book Changed Me

  • Money equals flexibility in life, the power to decide what you want to do with your time on your own terms. Becoming financially independent therefore pays an infinite dividend.
  • Keep throwing everything on the wall, a few things will stick. It’s the same in finances as it’s in life. Diversify your assets.

✍️ My Top 3 Quotes

  1. “Success is a lousy teacher, it seduces smart people into thinking they can’t lose.” – Bill Gates
  2. There is no reason to risk what you have and need for what you don’t have and don’t need.
  3. Manage your money in a way that helps you sleep at night.

📔 Summary & Notes

1: No One is Crazy

  • You can only know a limited amount of the reality surrounding all of us. Other see it differently. Equally smart people can disagree about how and why recessions happen, for example.

2: Luck & Risk

  • We prefer simple stories to facts in order to categorize our decisions in hindsight, even though we could have the full analyzed picture of what happened. It’s just not how we operate.
  • “The customer is always right” and “customers don’t know what they want” are both accepted pieces of business wisdom.
  • Praising and looking down on people without seeing the full picture is dangerous. They are not one-dimensional.
  • Don’t focus on individuals and single cases, look at the broad picture and spot patterns.
  • “Success is a lousy teacher, it seduces smart people into thinking they can’t lose.” – when things are going extremely well, realize it’s not as good as you think.
  • Failure is a lousy teacher, too, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk.

3: Never Enough

  • If you risk something that’s important to you for something that is unimportant to you, it just doesn’t make any sense.
  • The hardest financial skill is getting the goalpost to stop moving. To accept a certain lifestyle level as being enough for you.
  • Happiness is results minus expectations.

4: Confounding Compounding

  • Of all the economic wisdoms, this one is the most powerful: “Shut Up And Wait” – longterm economic growth will take care of it.
  • Warren Buffetts wealth was mainly created by investing for over 75 years without doing anything crazy. He’s playing the long game.

5: Getting Wealthy Vs. Staying Wealthy

  • The cornerstone of your strategy should be sticking around for a long time without being forced to give up.
  • Divide your personality into being optimistic about the future, but paranoid about what will prevent you from getting to the future.
  • Short-term paranoia helps to keep you alive long enough to exploit long-term optimism.

6: Tails, You Win

  • Diversification. A small number of events (i.e. successful stock investments into companies which made it out of dozens who failed) often account for the majority of outcomes. Throw everything on the wall, a few things will stick.
  • Berkshire Hathaway: they owned 400-500 different stocks over their lifetime and made the most money on about 10 of them.
  • We pay special attention to a role model’s successes we overlook that their gains came from a small percent of their actions.

7: Freedom

  • The ability to do what you want, when you want, with whom you want, for as long as you want, is priceless. It’s the highest dividend money pays.
  • The type of work which is done using your head, never stops. Control over your time has therefore diminished.
  • Your kids don’t want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them.

8: Man in the Car Paradox

  • What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does – especially from the people you want to respect and admire you.
  • Humility, kindness, and empathy will bring you more respect than horsepower ever will.

9: Wealth is What You Don’t See

  • Some people need to be told “If you spend money on things, you will end up with the things and not the money.”
  • Wealth is turning down that treat meal and actually burning net calories. It’s hard, and requires self-control.
  • The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency.

10: Save Money

  • Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
  • The decision to buy a new car or ride a bike is up to you and has a 100% chance of improving efficiency.
  • Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.
  • Intelligence is not a reliable advantage in a world that’s become as connected as ours has. But flexibility is. If you have flexibility you can wait for good opportunities, both in your career and for your investments.

11: Reasonable > Rational

  • You’re not a spreadsheet, you’re a person. Minimizing future regret is hard to rationalize on paper but easy to justify in real life. Something can be technically true but contextually nonsense.

12: Surprise!

  • The majority of what’s happening at any given moment in the global economy can be tied back to a handful of past events that were nearly impossible to predict.
  • The four most dangerous words in investing are, “it’s different this time”
  • The twelve most dangerous words in investing are, “The four most dangerous words in investing are, ‘it’s different this time’”
  • If Adolf Hitler hasn’t been born, if Bill Gates had died from Polio, if the 9/11 highjackers had forgotten their knives, the world would look a lot different today. Nobody could have expected those things to happen.

13: Room for Error

  • Assume the returns you will earn in your lifetime to be 1/3 lower than the historic average.
  • You can’t prepare for what you can’t envision. If there’s one way to guard against their damage, it’s avoiding single points of failure.

14: You’ll Change

  • Your goals will change. People are bad a seeing that coming. It’s possible you’ll change your mind about lots of things in your lifetime.
  • Don’t do anything extreme like saving everything or spending everything. Aim to have moderate savings, moderate free time, etc. to increase the odds that you’re able to stick with a plan and avoid regret when falling to the extreme sides of the spectrum.

15: Nothing’s Free

  • Every job looks easy when you’re not the one doing it.
  • The price of possible returns of investing is the possibility of losing. View it as a fee instead of as a fine.
  • Many people who are willing to pay the price of cars, houses, food, and vacations but try so hard to avoid paying the price of good investment returns.

16: You & Me

  • People make financial decisions they regret, and they often do so with scarce information and without logic. But those decisions made sense to them when they were made.
  • It’s hard to grasp that others have different goals than we do. An anchor of psychology is that we don’t realize that rational people can the world through a different lens than your own.

17: The Seduction of Pessimism

  • Optimism is seen a naïve, pessimism as more realistic. Forecasts of outrageous optimism are rarely taken as seriously as prophets of doom.
  • Progress happens too slow to notice, but setbacks happen too quickly to ignore.

18: When You’ll Believe Anything

  • Stories are the most powerful force in the economy. 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.
  • People listen to TV investment commentary because they tell a story of easily reached success.
  • Even though we know little of the world, we don’t realize it, because we tell ourselves a coherent story about what’s going on based on the little we know. Our limited mental model of reality is our only way of understanding.
  • We all want the complicated world we live in to make sense. So we tell ourselves stories to fill in the gaps of what are effectively blind spots.

19: All Together Now

  • There are universal truths in money, even if people come to different conclusions about how they want to apply those truths to their own finances.
  • Get out of your way to find humility when things are going right and forgiveness / compassion when they go wrong.
  • No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today.
  • Manage your money in a way that helps you sleep at night.
  • Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away.
  • Become OK 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, because not having control of your time is such a powerful and universal drag on happiness.
  • Be nice and less flashy, because what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.
  • Everyone’s life is a continuous chain of surprises. Savings that aren’t earmarked for anything in particular is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.
  • Respect the mess. Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer, just an answer that works for you.

20: Confessions

  • Independence doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want. It doesn’t rely on a doctor’s income, it’s mostly a matter of keeping your expectations in check and living below your means.
  • Every stock we own is a low-cost index fund. We invest money from every paycheck in these funds. There’s no set goal, it’s just whatever is leftover after we spend.

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