Psychology of Money by Morgan Housel: Book Review & Lessons Learned

"There is no reason to risk what you have and need for what you don’t have and don’t need."

written by oz chen

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My rating: 5/5 stars. Green stars because money.

Rating: 5 out of 5.

Read this book if you…

  • Enjoy reading about mental models and cognitive biases
  • Want to know how to manage your psychology around finances
  • Need to gain a broad perspective about money
  • Want to become a long(er) term investor

Disclosure: This post contains affiliate links, meaning when you click the links and make a purchase, I receive a commission. This is at no cost to you. Thanks for supporting my writing.

Wealth is a long term game of behavior. The longer anything takes, the more it becomes a game of managing our own psychology. Making money is often about hard skills (intelligence, technical prowess) while making money decisions is about soft skills (behavior, mindset, psychology). We tend to discount the latter, and that’s why it’s possible for lottery winners to waste their winnings or why celebrities go broke.

Psychology of Money became my favorite book on personal finance because Morgan Housel tells stories about how people actually behave with money—and what to do about it. This book is a huge inspiration for starting my weekly newsletter. It’s earned automatic “reference” status in my bookshelf; the type of book that I know I’ll pick up and reference again and again. I think you’ll feel the same.

My favorite lessons from Psychology of Money

  1. We’re less independent than we think. Environmental & historical context shapes mental models, thus shaping how we think about money. Someone who experienced the depression is not wrong to fear the stock market.
  2. Try to be reasonable over rationale; what helps you sleep at night is better than over-optimizing your finances and stressing out. Just because money seems like it’s rooted in numbers doesn’t mean we can’t approach it from a human & behavioral lens.
  3. Stop the goal post from moving; the cost of an ever-shifting goal post is not only unhappiness, but also correlated with the propensity to take on more undue risk to chase big returns
  4. Wealth is a long term, big and fluid game. Focus on staying in the game (i.e. not getting wiped out) to allow success to compound. This is more important than beating others or chasing huge gains.
  5. Surprises will continue to surprise us. We should humbly accept that the lesson about surprises is that there will always be things that catch us off guard, risks that we can’t anticipate. That’s why they’re surprises.

The book has 20 short chapters so it’s already an easy read. I pick my 7 favoritse and highlight quotes & lessons I learned from those chapters.

Selected chapter notes & quotes from Psychology of Money

Chapter highlights: Reasonable beats Rationale

This was the most profound chapter to me. Finally, someone put into words why we can’t rely on cold rationality to make financial decisions.

Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.

This is similar to the psychology of dieting: find the one that you can stick to for the longest time and don’t hate, versus the “best” diet that makes you hate your life and quit.

I also love Housel’s take – nay, permissiveness – to invest in individual stocks. The “rationale thing” is to invest in an index fund or what financial experts might say on the media. But the hidden risk is choosing something you don’t know, or worse, don’t like. There’s a way to leverage ownership bias for gain.

“Invest in a promising company you don’t care about, and you might enjoy it when everything’s going well. But when the tide inevitably turns you’re suddenly losing money on something you’re not interested in. It’s a double burden, and the path of least resistance is to move onto something else. If you’re passionate about the company to begin with—you love the mission, the product, the team, the science, whatever—the inevitable down times when you’re losing money or the company needs help are blunted by the fact that at least you feel like you’re part of something meaningful. That can be the necessary motivation that prevents you from giving up and moving on.”

Chapter highlights: No One’s Crazy

“If you were born in 1970, the S&P 500 increased almost 10-fold, adjusted for inflation, during your teens and 20s. That’s an amazing return. If you were born in 1950, the market went literally nowhere in your teens and 20s adjusted for inflation. Two groups of people, separated by chance of their birth year, go through life with a completely different view on how the stock market works.”

“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.”

Personal takeaway: our environment (time & place) greatly influences investing styles & risk tolerance. Keep this in mind when evaluating your own style, and be less judgy of others.

Chapter highlights: Getting Wealthy vs. Staying Wealthy

The chapter on disciplined investing. If you ever feel bad about being too conservative while your friends are YOLO investing, read this to feel better:

“You need short-term paranoia to keep you alive long enough to exploit long-term optimism.”

“No one wants to hold cash during a bull market. They want to own assets that go up a lot. You look and feel conservative holding cash during a bull market, because you become acutely aware of how much return you’re giving up by not owning the good stuff. Say cash earns 1% and stocks return 10% a year. That 9% gap will gnaw at you every day. But if that cash prevents you from having to sell your stocks during a bear market, the actual return you earned on that cash is not 1% a year—it could be many multiples of that, because preventing one desperate, ill-timed stock sale can do more for your lifetime returns.”

Personal takeaways:
1) Getting wealthy is a hard skill (intellectual); staying wealth is a soft skill (behavioral). 2) Housel flipped the idea of opportunity cost on its head for me. Sure, the opportunity cost of keeping cash on hand is that it may erode due to inflation. But no one is a perfect stock picker, so that cash can be worth multiples more than if it got stuck in a declining stock.

Chapter highlights: Luck & Risk

“Someone else’s failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of risk.”

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

“Focus less on specific individuals and case studies and more on broad patterns.”

Personal takeaway: I used to enjoy reading about the morning habits of successful people, thinking of them as magical tidbits I could incorporate into my life. If I did a morning routine like Tim Ferriss, I’d be successful too! Survivorship bias is real. When evaluating strategies, tips or advice from others, try to separate broadly applicable patterns vs any one individual’s idiosyncrasies.

Chapter highlights: Never Enough

“The hardest financial skill is getting the goalpost to stop moving. But it’s one of the most important. If expectations rise with results there is no logic in striving for more”

“There is no reason to risk what you have and need for what you don’t have and don’t need.”

“The only way to win in a Las Vegas casino is to exit as soon as you enter.”

Personal takeaway: This chapter speaks directly to nature of desire, ambition, and self comparison. The fancy term for this is hedonic adaptation; the colloquial version is keeping up with the Joneses.

Chapter highlights: Tails, You Win

The long tail is the invisible idea that success most often happens at the edges. The countless failed experiments get underreported, or not reported at all.

“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.”

“Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.”

“Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.”

Personal takeaway: Protect against the downside and optimize for the ability to stay “in the game” over the long term. Using this metaphor for long term investing: the more at-bats you get, the more chances you’ll get to strike out – and get home runs. The most important thing is to be able to swing the bat, and not get injured or avoid getting kicked out of the game entirely.

Chapter highlights: Surprise!

Just one simple lesson from this chapter reoriented how I think of surprises and the futility of trying to predict specifics of the future:

Whenever we are surprised by something, even if we admit that we made a mistake, we say, ‘Oh I’ll never make that mistake again.’ But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising

Personal takeaway: We should learn from our mistakes, but we shouldn’t be overconfident in our ability to avoid future, unforeseen mistakes. That’s the nature or risk. This un-guessable element of surprise supports reasons to save, and consider diversification/conservatism in portfolio building.

What did you think of Psychology of Money?

If you read Housel’s book, then I want to know: what are your takeaways and from ideas from the book?

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