Introduction
The Psychology of Money is a book by Morgan Housel published on 8 September 2020. Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. The Psychology of Money is a self help genre book. It covers observations on our relationship with money and tells us how our thinking towards finances. It truly tells the Timeless Lessons on Wealth, Greed, and Happiness. So let’s start again. (The Psychology of Money Summary)
Summary
In The Psychology of Money, the author shares some short stories exploring people’s strangest ways of thinking about money and teaching you how to better understand one of life’s most important things.
No One’s Crazy
People do some crazy things with money. But no one is crazy. Here’s the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.
Their attitudes about money were made in different worlds. And when that happens, a view of money that one group of people found outrageous may make perfect sense to another.
You can read what it was like to lose everything during The Great Recession, but you will never bear the emotional scars of those who survived it and are now too afraid to invest again. It’s important to remember, then, that until you’ve gone through a financial crisis and felt its consequences, you’ll never understand why people behave the way they do.
Luck & Risk
The line between ‘inspirationally bold’ and ‘silly careless’ can be a millimeter thick and visible only with retrospective vision. Risk and luck are couplets.
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.
Never Enough
There’s no reason to risk what you have and what you don’t have and don’t need.
Rajat Gupta. Bernie Madoff. These are the people who had everything – money, power, freedom – only to lose everything because they had no sense of enough. learn? There is no need to risk what you have and what you don’t have and don’t need. It seems that the hardest financial acumen is to keep the goalpost from moving.
Confounding Compounding
A good investment is not necessarily about earning the highest return, as the highest return is a one-time hit that cannot be replicated. It’s all about earning great returns that you can stick with and that can be replicated for the longest time. That’s when compounding runs wild.
Warren Buffett’s fortune isn’t just because of being a good investor. Rather it is because of being a good investor since childhood. At the time of writing, Warren Buffett has a net worth of $84.5 billion. Of that, $84.2 billion was deposited after his 50th birthday. The reverse nature of compounding prompts even the smartest of us to overlook its immense power.
Getting Wealthy vs. Staying Wealthy
Getting money requires taking risks, being optimistic and putting yourself out there. But keeping money requires the opposite of taking risks. It requires humility, and the fear that what you have created may be taken away from you just as fast. It requires frugality and the acknowledgment that at least what you have created is due to luck, so past success cannot be relied upon to repeat indefinitely.
The ability to stick around for long periods of time, without being wiped out or forced to give up, makes the biggest difference when it comes to making money. Compounding only works if you can give an asset years to grow.
Tails, You Win
Anything that is huge, profitable, famous or influential is the result of a tail event—an event of thousands or millions. And most of our attention goes to things that are huge, profitable, famous or influential. When all we pay attention to is the result of a tail, it is easy to understand how rare and powerful they are.
Freedom
The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today.
Man in the Car Paradox
People want money to signal to others that they should be liked and admired. But in reality those other people often shy away from praising you, not because they don’t think money is laudable, but because they use your money as a benchmark for their choices and their desire to be admired.
Wealth is What You Don’t See
We judge wealth by what we see, because that is the information that lies before us. We cannot see people’s bank accounts or brokerage statements. That’s why we rely on external appearances to gauge financial success. Cars. House. Instagram Photos. Modern capitalism fakes people’s help until they make it a cherished industry.
But the truth is that wealth is what you don’t see. The rich have a current income. Bought good cars. Bought a diamond But the money is hidden. It is an option not taken to buy something later. Not knowing the difference is the source of countless bad money decisions.
Save Money
Savings can be achieved by spending less. If you want less you can spend less. And you will desire less if you care less about what others think of you.
A high savings rate means you spend less than you can afford, and spending less means your savings become more than if you spend more.
Reasonable > Rational
A rational investor makes decisions based on numerical facts. A reasonable investor makes them in a conference room surrounded by coworkers you want to think highly of yourself, with a spouse you don’t want to disappoint, or judged against silly but realistic competitors. Who is your brother-in-law, your neighbor, and your own personal doubts. Investing has a social component that is often overlooked when viewed through a strictly financial lens. (The Psychology of Money Summary)
Reasonable is more realistic, and you have a better chance of sticking with it in the long run, which is what matters most when managing money. You are not a spreadsheet, remember. You are a person.
Surprise!
The true lesson to learn from surprises is that the world surprises. Many investors fall into the trap of what Housel calls the “historian predictors” fallacy: on past data as an indication of future conditions in a field where innovation and change are the lifeblood of progress. Past performance is not an indication of future results – the world changes.
Room for Error
The most important part of every planning is not planning according to your plan. Use room for error when estimating your future returns. As for his own investments, Housel assumes that the future returns he will earn over his lifetime will be less than the historical average. So, if I assume that the future will be the same as the past, he delivers more than that. This is his margin of safety.
You’ll Change
Visualizing the target is easy and fun. Visualizing a goal in a real-life context that grows with competitive pursuit is completely different. This has a major impact on our ability to plan for future financial goals.”
We are such poor predictors of our future that there is a word for this phenomenon: The End of History Illusion. We are aware of how much we have changed in the past, but we underestimate how much our personalities, desires and goals will change in the future.
Nothing’s Free
Everything has a price, and the key to many things with money is just to find out what that price is and be prepared to pay it. Housel writes, “Thinking of market volatility as a fee rather than a penalty is an important part of developing the kind of mindset that allows you to stay invested long enough to work in your favor.
You & Me
It’s hard to understand that other investor’s goals are different than ours, because one anchor of psychology may not realize that rational people can see the world through a different lens than your own. Rising prices persuade all investors in a way that the best marketers envy. They are the kind of drug that can turn price-conscious investors into dew-eyed optimists, detached from their reality by the actions of someone playing a different game.
The Seduction of Pessimism
In finance, more attention is paid to pessimism than to optimism, and therefore, it is more persuasive. Housel writes. “Optimistic fiction requires looking at a long stretch of history and development, which people tend to forget and make more effort to piece together.” True financial optimism, Housel believes, is to expect things to go bad and be surprised when they are not.
When You’ll Believe Anything
The more you want something to be true, the more likely you are to believe a story that makes it less likely to be true. For example, after World War I ended, some thought there would ever be another World War. Housel writes that there are many things in life that seem true to us because we want them to be true. He calls these things “fascinating imagination” and they have a huge impact on how we think about money – investments and the economy in particular.
Some quotes we all need to know
“After spending years around investors and business leaders I’ve come to realize that someone else’s failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of risk.”
Morgan Housel
The Psychology of Money
“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.”
Morgan Housel
The Psychology of Money
“Things that have never happened before happen all the time.”
Morgan Housel
The Psychology of Money
“You are one person in a game 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.” (The Psychology of Money Summary)
Morgan Housel
The Psychology of Money
Rating
5/5
Conclusion
A great book that teaches us to look at our money differently. Money is not just about numbers and formulas. Money is more about how different people from different backgrounds all interact with each other.
It is not just about money management but it is more in depth in psychology. It is a wholesome lesson where everyone can take something from the book for a lifetime.
This is one of those books that everyone should read. This book is not only full of money but also full of many life lessons. Reading it once is not enough, and it will give you a new perspective every time you re-read it.
The Psychology of Money Summary
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About the Author
Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal.
