The Psychology of Money by Morgan Housel is a collection of tips that teaches the reader how to manage and think about money.
There is no practical investing advice in the book. Housel does not tell you to buy gold or invest in crypto. Instead, he lays out a series of principles that the reader can use to guide themselves towards their financial goals – whatever those goals may be.
Housel is an experienced investor and business writer. He is able to cut through a lot of noise in The Psychology of Money to provide simple, applicable pieces of advice.
The Psychology of Money is a very interesting read for anyone looking to get their finances in order and start using their money intelligently.
The Psychology of Money aims to examine the weaknesses in our mental attitudes with money and examine the attitude of, in some cases, successful people in general – as a homogeneous group – to money. In other cases, the author lays out his own principles of how he believes we should think of and handle our finances.
Morgan Housel is a partner in a venture fund. He is known as an expert in the history of finance and behavioral finance. As well as winning a number of awards as a writer and a journalist, he has also been a finance columnist in the past for huge publications in the field like The Motley Fool and The Wall Street Journal.
The Psychology of Money is broken down into 18 chapters. Each of these chapters is a mini-lesson. As such, the book does not have an overarching narrative. There are a couple of key themes that are repeated throughout around long-term goals, compound interest, and the role of risk and luck.
The first lesson is that no one is crazy.
It is not clear where Housel gets the number from, but he states that a person’s personal experiences with money make up 0.00000001% of what’s happened in the world but those experiences make up around 80% of what we think of the world.
Housel’s theory is that our relationship with money is based on the experiences we have had with it in the past. Everyone has had different experiences. Therefore, when you see someone make a financial decision that you would not make, don’t judge them. The person’s experiences have taught them to make that decision.
However, Housel cautions the reader against making financial decisions based solely on experiences. Instead, Housel suggests that the reader should make financial decisions based on goals and objectives.
The second lesson is around luck and risk. Housel states that actions outside of your control will have more impact on your investments than anything that you can do to influence them. As an example, he looks at the case of Bill Gates.
Similar to the case that Malcolm Gladwell made in Outliers, Bill Gates is clearly very intelligent and worked extremely hard. However, he also had the good fortune to go to one of the few schools in the world at the time that happened to have a computer. This gave him a competitive advantage. There was a degree of luck there that without, there would be no Microsoft and no Bill Gates – the richest man in the world.
Housel notes that to combat the element of luck, we should focus on what works in general for a broad group of people rather than trying to re-create a Bill Gates-like fairy tale.
Lesson three is all about recognizing when you have enough. Housel recounts how it tends to be rich people who do crazy things with money. The thinking is that as soon as they get rich, their goals change. They want more and more and do it in a way that puts everything they have already earned at risk.
Housel says it is crucial for you to recognize when you have enough and to start playing it safe. The lesson is don’t risk what you have and need for something you want and don’t need.
Lesson four is perhaps the most strongly stressed in the book. It’s all about compounding and compound interest. Housel states that it is difficult for the mind to comprehend the power of compounding. This is really the crux of Housel’s advice – the key to good investing is to give it time.
As an investor, you don’t need incredible returns. You need to have reasonable returns over a long period of time. This is how you get rich.
Housel cites Warren Buffett as an example. Buffett now, at over 90 years of age, has a personal wealth of over $80 billion. However, he started investing when he was 10 years old, and well over 50% of his was accumulated after his 50th birthday.
Housel truly believes that compounding can bring you financial freedom.
Lesson five states that being a good investor is not about making great decisions all of the time. Instead, it’s about being consistent about not screwing up. This is again tied into compound interest. Housel believes not screwing up allows you to survive in the investment game for longer, therefore allowing your asset the time to compound.
Housel suggests that the reader should focus on getting their finances into shape so that they cannot be broken rather than focusing on huge returns.
Lesson six ties back into lesson two and has a similar takeaway. Housel suggests that you can be wrong half the time and still make a fortune. Along the same lines as Housel mentioned with Bill Gates, Housel says that the super-rich are a one-in-a-million story.
As a society, we give so much attention to the super-rich that we forget this. We hold them up and idolize them but it is almost impossible to replicate what they have done.
So instead of trying to recreate what Elon Musk, Reed Hastings or Jeff Bezos do, a clear investor is someone who does the basics right. They follow the average trends by making sound, sensible decisions that help them to achieve their own realistic goals rather than trying to recreate a miracle.
Lesson seven is a lesson on perspective. Housel says that controlling your own time – your freedom – is the highest dividend that money can pay.
Lessons eight and nine are also about perspective. Lesson 8 is the man in the car paradox. When you see a guy in a Ferrari, you don’t think that you want to be friends with that guy, you think that you want to be that guy. Many people build wealth because they think it will make people like them but all it will do is make people want to be like them which is a very different thing.
Lesson nine is about spending money on important things. Housel states that wealth is what you don’t see. It’s not blingy watches or fancy cars per se. Housel advises the reader not to judge a person’s wealth on what they see and in what possession people have. Housel states that true wealth is having the option to purchase more stuff than you can right now.
Along the same lines, lesson ten suggests that to save money, one of the best things you can do is remove your ego from the equation. Don’t spend money on unnecessary things to keep up with the Joneses.
He posits the formula: Savings = Income – Ego.
Housel circles back to the theme of flexibility. Having more savings in the bank and lower costs because you have removed the ego from your spending may mean that you can have the flexibility to work fewer hours or for a lower salary for a job you are more interested in or to invest in an opportunity you may not have been otherwise able to.
Lesson 11 is about being reasonable rather than always being rational. The same as with dieting. The most sound strategy is one you can maintain. There is a social aspect to investing that we forget and sometimes it’s impossible to always be coldly rational. Choose a strategy that you can stick with instead.
Lesson 12 states that things happen all the time that have never happened before. If you are always looking to the past to judge future investments you will be left behind by societal shifts.
This also leads on to lesson 13, where Housel states you need to leave yourself additional space to recover from mistakes or unforeseen circumstances. If you plan on things not going to plan and leave yourself extra wiggle room, you won’t be ruined if things go badly for a short while.
Lesson 14, states that you’ll change over time. So make sensible goals because in 5 or 10 years you won’t necessarily want the same things as you want now.
Lesson 15 suggests that everything has a price and just because you can’t see it, it doesn’t mean you won’t end up paying it. The market goes up and down. Sometimes you will lose money. If you are able to frame these dips as fees for playing the game rather than as losses it will help you stay the course. And as Housel has covered, staying the course is how you make the big money in the long run.
Lesson 16 is about being aware of who you are taking financial advice from. It’s very hard to apply the advice of someone who has different amounts of money or different goals to you. It won’t work in the end. Instead, look at the average and do what works for people in your situation in general.
Lesson 17 is to be optimistic. That will help you stay in long term. View blips as what they are – blips. Generally, things will get back on track and grow again, all you need to do is sit tight and ride it out.
Lesson 18, is that appealing fiction, and why stories are more powerful than statistics. It’s easy to get caught up in a good story but you have to be careful because some stories can be too good to be true.
Housel uses the example of World War I. It was the war to end all wars. No one wanted to see suffering like it ever again. However, the truth was that another war was right around the corner. Housel warns you not to delude yourself.
All in all, the book is about focusing on doing the basics right, not doing things silly, and being in for the long term.
What do readers say about The Psychology of Money?
Common sense and good advice
Readers stated that although there was not a lot of groundbreaking information in the book, it was good, simple, common-sense advice distilled into an easy-to-read and enjoyable book.
To have it all in one place was extremely useful and allowed the readers to have a set of principles to apply to their own financial lives.
Full of great quotes and soundbites
Readers mentioned there were a number of one-liners and soundbites that really grabbed their attention and turned what could have been abstract advice into real-life understandings that they could apply themselves.
For example, readers mentioned things like “Money’s greatest intrinsic value—and this can’t be overstated— is its ability to give you control over your time.” which helped them to reassess their thinking about why they wanted to get rich.
Or a quote on risk such as: “The line between “inspiringly bold” and “foolishly reckless” can be a millimeter thick and only visible with hindsight.” helped them to realize that not all makes are stupid but also that some risks that work out, in the end, might not have been worth it at all.
A number of readers mentioned that the title being The Psychology of Money they were expecting a deep dive into behavioral economics.
When they came to read the book, they found themselves to be disappointed that it was short, practical tips on how to approach managing your finances in a self-help style.
The Psychology of Money audiobook lasts for 5 hours and 48 minutes making it quite a short listen. This makes sense as the book is also around 250 pages – making it on the shorter side.
Despite there being some technical points, the narrator (Chris Hill) was able to explain them clearly and hold the listener’s attention.
Should I read The Psychology of Money?
- Common sense and good advice
- Full of great quotes and soundbites
- Misleading title
- Nothing groundbreaking
The Psychology of Money is a very well put together book that will allow the reader to have a better understanding of what the financial landscape looks like and how to approach it.
The book doesn’t not give any tactical advice, instead it gives a long-term, strategic vision of how you should manage your finances with the goal of having freedom in your life rahter than being rich for the sake of being rich.