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..

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.

• 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.

We often confuse being rich with being wealthy. Being rich means having a high income, but wealth is what you don’t spend.

It’s the money that remains unseen and unspent. The ability to save is the true indicator of wealth.

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.

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.

It’s a soft skill, where how you behave is more important than what you know.

Getting money and keeping money are two different skills.

Getting money requires taking risks, being optimistic, and putting yourself out there.

But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

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. 

People do some crazy things with money. But no one is crazy. Everyone has their own unique experience with how the world works. What seems crazy to you might makes sense to me.

One economist found that our willingness to take risks with money is influenced by our personal history.

Financial decisions are rarely made based solely on a spreadsheet. Personal history, unique perspectives, ego, pride, marketing, and incentives all play a role in how we make decisions about money.

Luck and risk are closely intertwined. They remind us that our efforts don't always determine our outcomes in life. With 7 billion people and infinite variables at play, we are just one player in the game.

Success is not solely a result of hard work, just as poverty is not always due to laziness. Luck and risk both play a role in shaping our lives. We must acknowledge that success can be deceiving, making us believe we are invincible. And failure can be a harsh teacher, making us believe our good decisions were bad because of uncontrollable risks.

We cannot control everything, and that's okay.

"Enough" is a tricky concept these days, always expanding. It's hard to know when to stop. Ambition can grow faster than satisfaction, often from comparing ourselves to others. An insatiable appetite for more will only lead to regret. Know when Never Enough is truly enough:

• Know when to stop
• Avoid comparing yourself to others and falling into the never-ending battle of wanting more
• Realize that having less is not too little, it's knowing when to be content
• There are many things not worth risking, no matter the potential gain