Book Review – The Psychology of Money

The Psychology of Money is a self-help book written by Morgan Housel. It is a short book of around 250 pages containing timeless lessons on wealth, greed and happiness. The book was published right in the middle of the Covid Pandemic (September 2020) and went on to sell over a million copies within a year! The timing of the book was perfect; a lot of people were re-evaluating their lives during the pandemic and this book offered some solid life guidance especially on personal finance.

The book is based on a blog post written by Morgan titled “The Psychology of Money” in June 2018. In the introduction section of the blog Morgan explains his attempt,

This report describes 20 flaws, biases, and causes of bad behavior I’ve seen pop up often when people deal with money.

The book explores these ideas in much more detail and explores themes outside money as well. I enjoyed reading both. If you prefer the slow burn of a book which goes through many examples to explain a concept, the book is for you.

The book is prescriptive in nature and some folks may find it off-putting. Some may argue that there isn’t much of a “psychology of money” in the book. But I agree with the author when he says that many people need to be told of the obvious things,

Singer Rihanna nearly went bankrupt after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”

The book consists of 20 small chapters each dealing with a core concept related to human behaviour and human biases. The title of the book is apt since Morgan has focused on our behaviours and biases that have a strong impact on our financial stability and health. I have kept the book on the bedside table since I want to reiterate to myself about some of these important ideas.

The book starts with a very persuasive story of Ronald Read, a janitor who by steady saving of his meagre income went on to accumulate over 8 million dollars of wealth! Morgan tells us that behaviour is important than intelligence when it comes to managing money,

The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behaviour is hard to teach, even to really smart people.

In the first chapter Morgan argues that however hard we try, it may not be possible to always see things from the perspective of another person. Our mistake is to judge things with our very limited money experience and that can be a problem. This chapter also refers to the working conditions in large companies such as Foxconn. Morgan tries to be politically correct when talking about this subject. But most Americans or for that matter most folks in first world countries have no clue how hard life can be in third world countries. Morgan quotes nephew of a chinese worker,

The idea of working in a “sweat shop” compared to that old lifestyle is an improvement, in my opinion. I know that my aunt would rather be “exploited” by an evil capitalist boss for a couple of dollars than have her body be exploited by several men for pennies.

We need to be very careful in judging people and their behaviour, especially when poverty and poor living conditions are involved.

The book also has plenty of life advice. Morgan explores the dual nature of luck and risk, the importance of contentment and how being reasonable is more important than being rational. He reminds us that,

Long-term planning is harder than it seems because people’s goals and desires change over time.

When it comes to personal finance, this book has some really good advice packaged with interesting facts and personal stories. We learn how the same principle of exponential growth due to compounding is behind both ice ages and wealth generation. He explores the relation between money, happiness and freedom. I fully agree with Morgan when he writes,

Controlling your time is the highest dividend money pays.

I am a big fan of Nassim Nicholas Taleb, whom I consider to be one of the best original thinkers of our time. Morgan quotes Taleb multiple times in the book especially in the context of risk and the importance of unexpected events in our lives. Whether it is investing or planning for the future, we need to be prepared for the unexpected.

The Psychology of Money is the book I wish I had read when I was young. That would have made a huge change to my current financial position. But as they say, better late than never!

As James Clear (author of Atomic Habits) says in the book – “Everyone should own a copy” of this book.

The Psychology of Money – Book Summary

Whenever I read a book, I always prepare a one page summary. The book psychology of money is a mix of factual analysis and practical guidance on personal finance and money in general. In this case my book summary is a set of instructions to remind myself of what I should do based on the learnings from the book.

  • When making money decisions, beware of your limited knowledge and experience.
  • Focus on broader ideas and patterns instead of specific individuals and their actions.
  • Train and remind yourself to be content, there are things not worth risking.
  • Long term steady investment can give compounding returns.
  • Be optimistic about future, but paranoid about things that can affect that future.
  • Apply the principle of stop-loss to your life.
  • Use money to control your time. That is freedom.
  • Be humble, kind and empathetic. It will bring respect.
  • Don’t spend money on things you don’t need. Save money.
  • Being reasonable than trying to be coldly rational gives us peace of mind.
  • Plan ahead. But also think about what happens when the plan goes wrong.
  • Beware that you and everyone around you will change over time.
  • Every decision has a price that you should be ready to pay.
  • Before any comparison and decision making, make sure that both sides are playing the same game!
  • Avoid extreme decisions since things can change.

Top 10 Lessons from the Book – The Psychology of Money

  1. Less ego, more wealth.
  2. Manage your money in a way that helps you sleep at night.
  3. If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
  4. Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune.
  5. Use money to gain control over your time.
  6. Save. Just save. You don’t need a specific reason to save.
  7. Define the cost of success and be ready to pay it.
  8. Worship room for error.
  9. Avoid the extreme ends of financial decisions.
  10. You should like risk because it pays off over time.

Interesting Quotes from the Psychology of Money Book

  • The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behaviour is hard to teach, even to really smart people.
  • I love Voltaire’s observation that “History never repeats itself; man always does.” It applies so well to how we behave with money.
  • Everyone has their own unique experience with how the world works. And what you’ve experienced is more compelling than what you learn second-hand. So all of us—you, me, everyone—go through life anchored to a set of views about how money works that vary wildly from person to person. What seems crazy to you might make sense to me.
  • The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.
  • Nothing is as good or as bad as it seems.
  • Bill Gates experienced one in a million luck by ending up at Lakeside. Kent Evans experienced one in a million risk by never getting to finish what he and Gates set out to achieve.
  • “The customer is always right” and “customers don’t know what they want” are both accepted business wisdom.
  • Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
  • Therefore, focus less on specific individuals and case studies and more on broad patterns.
  • The hardest financial skill is getting the goalpost to stop moving.
  • Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.
  • There are many things never worth risking, no matter the potential gain.
  • His skill is investing, but his secret is time.
  • Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.
  • More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.
  • Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
  • A barbelled personality – optimistic about the future, but paranoid about what will prevent you from getting to the future – is vital.
  • You can be wrong half the time and still make a fortune.
  • A lot of things in business and investing work this way. Long tails – the farthest ends of a distribution of outcomes – have tremendous influence in finance, where a small number of events can account for the majority of outcomes.
  • Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.” It’s the same in investing.
  • At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them. Charlie Munger followed up: “If you remove just a few of Berkshire’s top investments, its long-term track record is pretty average.”
  • Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.
  • 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.
  • No one is impressed with your possessions as much as you are.
  • Humility, kindness, and empathy will bring you more respect than horsepower ever will.
  • Spending money to show people how much money you have is the fastest way to have less money.
  • The first idea – simple, but easy to overlook – is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
  • In a world where intelligence is hyper-competitive and many previous technical skills have become automated, competitive advantages tilt toward nuanced and soft skills – like communication, empathy, and, perhaps most of all, flexibility.
  • Aiming to be mostly reasonable works better than trying to be coldly rational.
  • One is that “minimising future regret” is hard to rationalise on paper but easy to justify in real life.
  • History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future.
  • Benjamin Graham advocated purchasing stocks trading for less than their net working assets – basically cash in the bank minus all debts. This sounds great, but few stocks actually trade that cheaply anymore – other than, say, a penny stock accused of accounting fraud.
  • The most important part of every plan is planning on your plan not going according to plan.
  • The purpose of the margin of safety is to render the forecast unnecessary.
  • Nassim Taleb says, “You can be risk loving and yet completely averse to ruin.”
  • A good rule of thumb for a lot of things in life is that everything that can break will eventually break.
  • Long-term planning is harder than it seems because people’s goals and desires change over time.
  • Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily.
  • Every job looks easy when you’re not the one doing it because the challenges faced by someone in the arena are often invisible to those in the crowd.
  • The trick is convincing yourself that the market’s fee is worth it. That’s the only way to properly deal with volatility and uncertainty – not just putting up with it, but realising that it’s an admission fee worth paying.
    A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviours of people playing different games than you are. The main thing I can recommend is going out of your way to identify what game you’re playing.
  • Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
  • John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”
  • There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.
  • There are lots of overnight tragedies. There are rarely overnight miracles.
  • In investing you must identify the price of success— volatility and loss amid the long backdrop of growth—and be willing to pay it.
  • 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.
  • Psychologist Philip Tetlock once wrote: “We need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.”
  • NASA’s New Horizons spacecraft passed by Pluto two years ago. It was a three-billion mile trip that took nine and a half years. According to NASA, the trip “took about one minute less than predicted when the craft was launched in January 2006.”

December 28, 2022 | Posted in Opinion No Comments » | By Jayson

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