Book cover art for The Psychology of Money
The Psychology of Money
Morgan Housel

This book belongs to the ranks of 'I wish I'd read this 10/15/20 years ago'. For good reason, too: rather than just taking another bland look at money tactics, Housel uncovers the unusual human psychology that drives all our money-related behaviours. Refreshing.

'The premise of this book is that doing well with money has a 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.' (Page 2)

No One Is Crazy

'Knowing what to do tells you nothing about what happens in your head when you try to do it.' (Page 5)

We all have had—and continue to have—wildly different experiences with money. The difference of age or upbringing or family or geography can completely shift the ways we think about money.

Everyone is different. Differences include mathematical skill, gaps in knowledge, the marketing you are persuaded by... all of these differences accrue in addition to the experiences that have formed us.

Luck and Risk Are Not What You Think

'The world is too complex to allow 100% of actions to dictate 100% of your outcomes.' (Page 28)

Bill Gates's school had a timeshare computer that was cutting edge and way ahead of its time. Without the school having access to it, and Gates not being introduced to it, would that mean that there would have been no Microsoft?

Luck is impossible to quantify and rude to mention.

We all want to know the answers to the big questions:

  • What investing strategies work? Which ones don't?
  • What business strategies work?
  • Which ones don't?
  • How do you avoid being poor?
  • How do you get rich?

'We tend to seek out these lessons by observing successes and you failures and saying, "Do what she did, avoid what he did."' (Page 30) But this is fraught, because we cannot know what was going through their heads nor what risk or luck they experienced.

When we judge others for their errors and losses, we chalk it all up to them having made bad decisions. When we judge ourselves, though? It was a risky business all along. We can never assume that success or failure is 100% to do with decisions and work. Risk must always play some part, for us and for others.

Therefore, we need to focus less on individuals and more on patterns.

'You are one person in a game The with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.' (Page 28)

Greed

There are too many examples of people straining and striving for more when they absolutely don't need to. This happens because the egos of these people is always ahead of them, making them always want more. If their egos were to shrink down, they would promptly stop everything and live happy, quiet lives.

The key to not letting ego get ahead is to never let the goalposts move. This means never letting ambition outstrip your feeling of satisfaction.

The inability to say no to another dollar will, eventually, catch up with you.

Compounding

'There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait. It's just one page with a long-term chart of economic growth.' (Page 52)

Surviving

'There's only one way to stay wealthy: some combination of frugality and paranoia.' (Page 57)

Find a way to be unbreakable. Have reserves, have a fallback; this lets you stick it out when things get rough.

Give yourself a margin of safety, remain optimistic about the future but stay paranoid about how you got to where you are in the first place.

Tail Events and Outliers

Tail events, the highly unlikely and unexpected 'black swans' that drive the majority of change, are nigh on impossible to predict. Stick around long enough and these will come through, come rain or shine. 9/11, 2008, Covid19 are all prime examples.

The same is true of investment decisions, businesses, ventures of any kind. Some will drive massive growth... the others will just be a collection of also-rans.

'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 "If you remove just a few of Berkshire's top investments, its longterm track record is pretty average."' (Page 80)

You will, sadly, likely not predict outlier events. This is seldom anything to do with any failure to analyse, though, and more to do with a failure to imagine.

'But these kinds of things happen all the time. You can plan for every risk except the things that are too crazy to cross your mind. And those crazy things can do the most harm, because they happen more often than you think and you have no plan for how to deal with them.' (Page 144)

Freedom

'The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.' (Page 83)

The single biggest variable associated with happiness is being able to do what you want with your time.

Displays of Wealth

'Spending money to show people how much money you have is the fastest to have less money.' (Page 95)

Wealth is what you don't see. What you see is money that they no longer have because they spent it on some damn thing. Actual wealth is not spending the money you do have.

The hidden nature of wealth makes it hard to know how wealthy anyone is, so it is all too easy for us to take the wrong cues from the wrong places.

'When most people say they want to be a millionaire, what they might actually mean is "I'd like to spend a million dollars." And that is literally the opposite of being a millionaire.' (Page 98)

Save Money

'Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.' (Page 107)

Above a certain 'Maslow Hierarchy' level, we are all just peacocking with our well. Peacock with your wealth less... and save that money. You don't need a specific reason to be saving money, you just should. This will give you greater wealth and more freedom over time.

Error

'The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next.' (Page 128)

Leave enough room for error. Model fo the worst. Save money. Give yourself breathing room.

Reasonable > Rational

'The reasonable investors who love their technically imperfect strategies have an edge, because they're more likely to stick with those strategies.' (Page 118)

Human behaviour is unusual. You are not rational and neither am I!

We All Change, All of the Time

What we aspire to be, and what we aim for, changes over time. So do the things we want, the places we live, and the circles we move in.

'The End of History Illusion' is the belief that, although we have changed a lot in life, we're all done now and won't be changing anymore. This is totally untrue because, of course, we and many other things will continue to change as we go on.

So, make sure you have no 'sunk costs', keep saving and just let compounding do all the hard work for you while you change from month to month and year to year.

Taking Your Cue From Others

Everyone is doing different things for different reasons, at different times, with different time horizons.

For examples: bubbles do damage when long term investors play a game where they take their cues from the short term investors who are playing a completely different game altogether.

On bubbles: '[This] process feeds on itself. As traders push up short-term returns, they attract even more traders. Before long-and it often doesn't take long-the dominant market price-setters with the most authority are those with shorter time horizons.' (Page 169)

This all happens because it is very hard for us to grasp that others see the world in a very different way to us.

Optimism v Pessimism

Optimism sounds dumb. Pessimism sounds smart and insightful.

Extremes often don't last long because supply and demand adapt in hard-to-predict ways over time.

Progress = slow = hard to notice.

Setbacks = fast = hard to ignore.

'If a smart person tells me they have a stock pick that's going to rise 10-fold in the next year, I will immediately write them off as full of nonsense. If someone who's full of nonsense tells me that a stock I own is about to collapse because it's an accounting fraud, I will clear calendar and listen to their word.' (Page 179)

Data and Reality v Stories

'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."' (Page 200)

Appealing fictions are things that we desperately want to be true. This happens because we all take incomplete knowledge of the world and turn it into comprehendible stories that all make sense to us.

'There are many things in life that we think are true because we desperately want them to be true. I call these things "appealing fictions." They have a big impact on how we think about money-particularly investments and the economy. An appealing fiction happens when you are smart, you want to find solutions, but face a combination of limited control and high stakes. They are extremely powerful. They can make you believe just about anything.' (Page 194)

Risk is what's left over when you think you've thought of everything.

Key Lessons and Home Truths

'No matter how much money you earn you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today.' (Page 208)

'Comfortably living below what you can afford, without much desire for more, removes a tremendous amount of social pressure that many people in the modern first world subject themselves to.' (Page 216)

'Beating the market should be hard; the odds of success should be low. If they weren't, everyone would do it, and if everyone it there would be no opportunity.' (Page 218)

Post-War America

'People measure their well-being against their peers. And for most of the 1945-1980 period, people had a lot of what looked like peers to compare themselves to. Many people-most people-lived lives that were either equal or at least fathomable to those around them. The idea that people's lives equalized as much as their incomes is an important point of this story we’ll come back to.' (Page 229)

Key facts:

  • The biggest difference between the economy of the 1945–1973 period and that of the 1982–2000 period was that the same amount of growth found its way into totally different pockets
  • Between 1993 and 2012, the top I percent saw their incomes grow 86.1 percent, while the bottom 99 percent saw just 6.6 percent growth
  • While the top i percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall

Between the end of WW2 and the mid 70s, everyone seemed to get wealthier in America all at the same time. Then, things changed and spoils accrued to the wealthy while people still believed in how things were. This created a culture of huge inequality and resentment.

'Tax cuts over the last 20 years have predominantly gone to those with higher incomes. People with higher incomes send their kids to the best colleges. Those kids can go on to earn higher incomes and invest in corporate debt that will be backstopped by the Fed, own stocks that will be supported by various government policies, and so on.'

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