The Psychology of Money Summary

Doing well with money is not necessarily about what you know, but about how you behave. Is what Morgan Housel explores in his popular book, where he shares 19 stories that explore the behavioral aspects of personal finance.

To Note:

• Financial success is not hard science, it’s a soft skill where how you behave is more important than what you know.
• To grasp why people bury themselves in debt, you need to study the history of greed, insecurity & optimism.
• Not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself

Everyone looks at money through the lens of their past experiences.

You can read what it was like to lose everything during, say, The Great Recession, but you will never bear the emotional scars of those who survived it and are now afraid to invest again. It’s important to remember, then, that until you’ve lived through a financial crisis and felt its consequences, you will never understand why people behave the way they do. 

Nothing is as good or as bad as it seems. Every outcome in life is guided by forces other than individual effort. Bill Gates had a competitive advantage over millions of other students because he attended one of the only high schools in the world that had the cash and foresight to buy a computer. In finance, luck is as much a force as risk.

• Be careful who you praise and admire, and be careful who you look down upon.
• Focus less on studying specific individuals and more on studying broad patterns.

• 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.
• Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.

• As investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” We are all victims, in different ways, to that truth.
• Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.
• 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..

• Financial outcomes are driven by luck, independent of intelligence and effort.
• Financial success is not hard science. It’s a soft skill, where how you behave is more important than what you know.
• To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism. To get why investors sell out at the bottom of a bear market you don’t need to study the math of expected future returns; you need to think about the agony of looking at your family and wondering if your investments are imperiling their future.

People have different views about money.

• You know stuff about money that I don’t, and vice versa. You go through life with different beliefs, goals, and forecasts, from what I do. That’s not because one of us is smarter than the other, or has better information. It’s because we’ve had different lives shaped by different and equally persuasive experiences.
• 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.

Doing well with money has little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach.

A genius who loses control of their emotions can be a financial disaster. The opposite is also true.

Our personal experiences with money are very little of what happened in the world and maybe 80% of how we think the world works.

We all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

So no one is crazy.

Luck & Risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.

Focus less on specific individuals and more on broad patterns.

Nothing is as good or bad as it seems.

Studying a specific person can be dangerous because we tend to study extreme examples—the billionaires, the CEOs, or the massive failures that dominate the news—and extreme examples are often the least applicable to other situations, given their complexity. The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.

To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish. It is just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense

People like to feel like they’re in control—in the drivers’ seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.

No one is crazy, from their own perspective, about managing money. Why then, there are just 2668 billionaires among 8 billion persons across the world? The book by Housel confronts the reader with their innate relationship with money, which, at times, may not be very intuitive.

It is not the usual set of outcomes, but those 0.01% of miracles that might make or break you. Your success, both financially and otherwise, depends on how you seize these opportunities.

That being said, generalising these 'tails' or 'miracles' and learning from, and even worse, applying them could lead to catastrophes. 

1. Money is not just a tool for buying things, it also shapes our emotions & attitudes in ways that can be both positive and negative.
2. The way we think about money is often irrational & influenced by emotions, which can lead to poor financial decisions.
3. The role of luck in financial success is often overlooked, but plays significant role in shaping financial outcomes.
4. Social norms & social expectations play a big role in financial behavior & attitudes towards money.
5. Understanding psychological & emotional aspects of money can help us make better financial decisions & lead a more fulfilling life.

- Theory isn’t reality

“The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.”

We are not spreadsheets. As much as reading can inform us about what has happened in the past, like stock market crashes or how stocks have trended up and to the right over time, learning about something in a book is very different from actually experiencing the event. So be careful. You may think that you can hold your stocks during a 30% market downturn because you know that only suckers sell at the bottom, but it’s only when you experience it

It’s easy to convince yourself that your financial outcomes are determined entirely by the quality of your decisions and actions, but that’s not always the case. You can make good decisions that lead to poor financial outcomes. And you can make bad decisions that lead to good financial outcomes. You have to account for the role of luck and risk.

“But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.”

To mitigate the risk of overweighting the role of individual effort in determining outcomes:

1. Be cautious about the people who you admire and look down upon. Those at the top may have been the benefactors of luck while those at the bottom may have been the victims of risk.
2. Focus less on individuals, and turn your mind to broader patterns. It’s difficult to replicate the outcomes of successful individuals, but you may be able to participate in broader patterns.

Be kind to yourself when you make a mistake or end up on the wrong side of risk. The world is uncertain, and it may not be your fault.

Saving money is the gap between your ego and your income, and wealth is what you don't see. So Wealth is created by suppressing what you could buy today in order to more stuff or more options in the future.

Some people won't sleep well unless they are earning the highest returns; others will only get a good rest if they're conservatively invested. To each their own.

Time is the most powerful force in investing. It makes little things grow and big mistakes fade away. It can't neutralize luck and risk, but it pushes results closer towards what people deserve.

• Doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.
• Every decision people make with money is justified by taking the information they have at the moment and pugging it into their unique mental model of how the world works.

People tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you, not because they don't think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.

• Have a six month emergency fund and save 10% of your salary.
• The ability to stick around for a long time, without wiping or being forced to give up is what makes the biggest difference.
• Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.
• 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.
• Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.