Psychology of Money - Morgan Housel


I enjoyed this book.

This book helped me understand my approach to money and allowed me to accept the everyday challenges of handling or managing it. These lessons helped shift my mindset, and I will revisit this book often.

The twenty lessons in this book can be approached independently. Delving into each of those lessons in this blog post is going to be a bit excessive, so here are six of the lessons that resonated with me -

#01 - No One’s Crazy

#02 - Luck And Risk

#04 - Confounding Compounding

#05 - Getting Wealthy vs. Staying Wealthy

#08 - Man in the Car Paradox

#16 - You & Me

#1 No One’s Crazy

💡 Most education on money isn’t new.

We all do crazy stuff with money because we’re all relatively new to this game, and what looks crazy to you might make sense to me. But no one is crazy; we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

The first lesson in this book concerns how young we are as a society in managing money.

Many financial instruments gaining public attention or notoriety have been introduced relatively recently. There haven’t been enough cycles to provide a solid understanding or predictability of how they will perform.

And that idea - “What you're doing seems crazy but I kind of understand why you’re doing it” - uncovers the root of many of our financial decisions.

Only a quarter of those age 65 or older had pension income in 1975

The 401(k) - did not exist until 1978. The Roth IRA was not born until 1998

#2 Luck and Risk

The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money.

People just don’t realize that, in most cases, money and wealth are entirely attributable to luck.

An example in the book describes how Bill Gates’ class at Lakeside School had access to early computer technology. This was only made possible due to the efforts of his high school math and science teacher and money raised by the Mother’s Club. This early exposure meant that Bill Gates (and the rest of his classmates) had a head start.

Focus less on specific individuals and case studies and more on broad patterns.

But since it’s hard to quantify luck and rude to suggest people’s success is owed to it, the default stance is often to implicitly ignore luck as the factor of success.

The more extreme the outcome, the less likely you can apply its lessons to your own life because the more likely the outcomes were influenced by extreme ends of luck or risk.

Contrasting the Luck and Risk between two corporations that engaged in illegal activities -

You can praise Vanderbilt for flaunting the law with as much passion as you criticize Enron for doing the same. Perhaps one got lucky by avoiding the arm of the law while the other found itself on the side of risk.

#4 Confounding Compounding

As I write this, Warren Buffet’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security in his mid-60s.

We don’t do this because it doesn’t sound intuitive. However, the stock market has consistently increased over time.

But good investing isn’t necessarily about earning the highest returns because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.

#5 Getting Wealthy vs Staying Wealthy

💡 Longevity is Key

This lesson had two sad stories of Livermore and Germansky, who were good at getting wealthy but had trouble staying wealthy.

The ability to stick it out makes a big difference when your wealth has room to compound.

The converse is that you lose all your money and have no wealth to compound.

This lesson in the book lays out a 3-point survival mindset that I have summarized below -

  1. Be financially unbreakable. You will get the most significant returns - because you will stick around long enough for compounding.
  2. Be prepared to fail. Have a good plan - but also have contingencies and a margin of safety.
  3. Be optimistic about the future - but paranoid about what will prevent you from getting there. Short-term paranoia and long-term optimism are working together.

#8 Man in the Car Paradox

💡 No one is impressed by your possessions as much as you are.

In this brief chapter, the author describes the paradox of status symbols linked to wealth - cars, homes, and jobs.

People who intentionally aspire to achieve these symbols are doing so for attention. Often, the possessions receive the bulk of the attention rather than the individual.

As an example, the author describes how when people see a fancy car, they often spend more time envisioning themselves in that car rather than the individual currently driving it.

There is a paradox here: people tend to want wealth to signal to others that they should be liked and admired.

If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will

#16 You & Me

💡 People invest for different reasons.

Know your reason and why other people are investing the way they are.

Many finance and investment decisions are rooted in watching what other people do and either copying them or betting against them. But when you don’t know why someone behaves like they do, you won’t know how long they’ll continue acting that way, what will make them change their mind, or whether they'll ever learn their lesson.

Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.

A day trader could accomplish what they need whether Yahoo! was at $5 a share or $500 a share as long as it moved in the right direction that day.

We’re just playing a different game.