Morgan Housel’s The Psychology of Money sold millions of copies, and for good reason. Published in 2020, its astute money lessons catapulted it to instantly timeless status, worthy of praise and analysis, but I took even more inspiration from his psychological lessons.
Libraries are full of books on behavioral finance, which seek to identify our money missteps in an attempt to “fix” them. I’ve found most of those simply scold the reader without offering much practical help. They break you down without building you back up.
On the other hand, Housel accepts that our money decisions are not solely determined by discipline and financial acumen but also by the human psychology that pushes and pulls us daily. He encourages the readers to identify their human nature and realize how it impacts their financial journey. His teachings can be tremendously helpful to anyone willing to listen.
Here are a few lessons I found particularly profound.
No One Is Crazy
Financial behaviors are deeply influenced by personal history and experiences, not just logic or education. Some of us grew up in poverty, some in wealth. Some of us have faced inflation head-on; others went nearly 30 years without a recession. These diverse life paths are why two intelligent people can sit down, talk about money, and disagree. Save or spend? Invest or hold off?
Our personal histories shape our viewpoints. No matter what yours looks like, you aren’t crazy. It’s your money, and Housel makes it clear that however you feel about it is correct.
Freedom
If there’s one thing money can truly offer us, it’s freedom. This isn’t just about buying things; it’s about the ability to control our own lives—autonomy over how we spend our time. Housel cites Angus Campbell, a University of Michigan researcher who explored what makes people happy. In his 1981 book, The Sense of Well-being in America, he concluded that more than income, job prestige, or any other factor, having control over one’s life is the strongest predictor of happiness. Perhaps the most significant dividend money can pay.
The freedom to retire on our own terms rather than out of necessity is a prime example of this autonomy. By sharing his experience of a grueling internship in investment banking, Housel found that even passionate work becomes a chore if it lacks autonomy. This phenomenon, known as “reactance,” highlights our innate desire to be in the driver’s seat of our lives.
Recognizing this human desire can help guide us toward making financial decisions that enhance our autonomy, which could lead to a more prosperous, more fulfilling life.
Luck and Risk
Success often involves an element of luck, and acknowledging this can lead to more humility and better decision-making. We’ve all seen successful people deny this reality, claiming every victory, whitewashing every defeat, and conveniently forgetting about any helping hands along the way, standing on the shoulders of giants and pretending to be tall.
Housel expounds upon this dynamic by re-telling Bill Gates’ story. Undoubtedly, Gates is bright and skilled but also had a massive stroke of luck. In 1968, only about one out of every one million high school students had access to a personal computer. At Lakeside School, Bill Gates was one of them. He won the educational lottery, giving him a considerable head start.
He famously said, “If there had been no Lakeside, there would have been no Microsoft.”
On the flip side, Gates’ school friend, Kent Evans, died at a young age. If he had lived and Gates had died, perhaps Evans would’ve been the famous Microsoft co-founder. The point isn’t to remove Bill Gates’ intelligence and savvy from his success story but to add luck to it. Success is often about being prepared to act when a lucky opportunity presents itself.
Morgan Housel pulls back the curtain on the reality of success. Understanding this helps us navigate our own paths with more humility and awareness of the broader forces at play.
Knowing How Much Is Enough
Recognizing when you have enough is crucial to avoiding the pitfalls of greed and maintaining financial peace.
The story of Raj Gupta helps Housel illustrate this point. Gupta grew up in the slums but made his way to the U.S. and amassed a fortune of more than $100 million as a top executive. His desire for more was so intense that he got caught up in an insider trading scheme that cost him everything: his fortune, reputation, and legacy. Not knowing when you’ve got enough can lead to disaster.
Gupta’s story might fall on the extreme end, but it shines a bright light on a critical financial skill—figuring out what “enough” means for you. It’s about setting those financial goalposts and not moving them just because you can. Knowing when you’ve got “enough” is a powerful step toward financial peace and security in a world where “more” is constantly advertised.
Housel points to the importance of avoiding social comparisons. Trying to “win” by having more than others is an unwinnable game because there’s always someone with more.
“Enough” isn’t about settling for too little or giving up ambition; it’s about understanding what’s truly valuable in your life and ensuring you don’t risk it for just a little more wealth.
The Power of Compounding
The strategy that can help allow you to stay in the game the longest and sleep well at night is likely the right strategy.
Housel explains how the subtle effect of Earth’s five major ice ages led to Iceland’s formation. Instead of the summer sun melting all of the snow and ice, a small amount remained. Over millions of years, this slight difference led to the accumulation and creation of the tiny Nordic island nation and is a perfect example of how something seemingly insignificant can lead to monumental results over time.
Warren Buffett, one of the most successful investors in history, understands this concept. His big secret to success is time. Having been in the game for over three-quarters of a century, he started young and stayed in the market. By the age of 30, Buffett already had over a million dollars. Most of his wealth, however, wasn’t made in those early years but accumulated over time, thanks to the power of compounding. If he had started a decade later or quit a decade earlier, we might not know his name as we do today.
For further evidence, look at James Simons, another admired investor, who has seen astonishing annual returns of 66%. Still, he has yet to reach Buffett’s level of wealth because he hasn’t been invested as long. While high returns are attractive, the real magic in investing comes from good, consistent returns over an extended period.
The story of Iceland’s formation and the investment careers of Buffett and Simons teaches us that it’s not the size of the initial advantage but the ability to maintain and build on it over time that truly counts.
Getting Wealthy vs. Staying Wealthy
To navigate the complex journey of wealth, Housel says we need a mix of short-term paranoia to ensure survival and long-term optimism to seize growth opportunities. This dual approach helps one accumulate wealth and, more importantly, preserve and grow it amidst the inevitable ups and downs of economic cycles.
Housel gives us the tales of Jesse Livermore, who made a fortune betting against the market before Black Monday, and Abraham Germansky, a real estate mogul. Despite their initial successes, both faced tragic ends after continuously risking it all.
Housel writes that 40% of all companies that go public eventually fail, and the Forbes 400 list sees a 20% turnover every decade. These stats highlight a crucial distinction: earning money and keeping it require different sets of skills.
The primary goal should be to become financially unbreakable. This means being able to withstand financial shocks, which keeps you in the game long enough to benefit from compounding. Consider the unexpected—like the 9/11 attacks, the housing crisis, or the COVID-19 pandemic. A good financial plan accounts for such unpredictability, leaving room for error.
The history of the US economy teaches us that growth and progress often come hand in hand with loss and challenges. A pragmatic approach—combining short-term caution with long-term optimism—is essential for navigating the uncertainties of life and the economy.
Tails You Win: The Power of Tail Events
The rare, unexpected outcomes—the tail events—often drive success more than we realize. Housel gives the example of Heinz Berggruen’s journey from a humble beginning in Germany to becoming a billionaire art dealer. Despite most of his art collection not appreciating significantly in value, a few critical pieces by artists like Picasso skyrocketed, making his portfolio immensely valuable. This principle isn’t far off from the strategy behind index funds: spread your bets wide and let the few winners pay off big.
Disney’s Turnaround provides another example. Walt Disney’s early forays into animation were financial disasters, but “Snow White and the Seven Dwarfs” changed everything. This one film cleared all debts and set a new course for the company. Similarly, venture capital investments often follow this pattern: many fail, but a few successes can be transformative.
Tail events aren’t just external; they can happen within companies, too. Innovations like Amazon’s web services and Prime membership are examples of successful bets among many that didn’t pan out. The lesson here is about perseverance and the willingness to pursue many avenues, knowing that a few will drive most of the success.
Most financial advice focuses on the present, but the real impact comes from how you react (or don’t react) during the rare, crucial moments that really matter. Even through downturns, consistent investment typically yields better outcomes than trying to time the market based on economic cycles.
The most significant impacts often come from the least expected places. Whether in art, venture capital, or personal investing, spreading out your bets and staying the course through the ups and downs can lead to outsized successes, thanks to the power of tail events.
Final Summary
“The Psychology of Money” profoundly explores how our behaviors, beliefs, and backgrounds shape our financial decisions more than any mathematical formula could. Through engaging stories and practical wisdom, Morgan Housel uncovers money management’s often-overlooked psychological foundations, emphasizing the importance of humility, independence, and long-term thinking.
It teaches us that true wealth and financial security stem not from chasing returns or outdoing others but from understanding ourselves and the psychological forces that drive our financial behaviors, ultimately guiding us toward a more thoughtful, contented, and independent life.
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