10 Success Lessons from “The Psychology of Money” by Morgan Housel (Book Summary)

 

Overview of The Psychology of Money:

“The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave.”

• “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. I call this soft skill the psychology of money.”
• “The aim of this book is to use short stories to convince you that soft skills are more important than the technical side of money.”
• “We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).”
• “Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors.“

1. Never Enough

“Life isn’t any fun without a sense of enough. Happiness, as it’s said, just results minus expectations.”

• “‘Enough’ is not too little … ‘Enough’ is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.”
• “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 because you’ll feel the same after putting in the extra effort. It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction.”
• “Social comparison is the problem here … The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. This means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you.”
• “There is no reason to risk what you have and need for what you don’t have and don’t need.”
• “There are many things never worth risking, no matter the potential gain.”
• “Maintaining a lifestyle below what you can afford is avoiding the psychological treadmill of keeping up with the Joneses.” (Note: See voluntary simplicity)

2. Getting Wealthy vs. Staying Wealthy

“There are a million ways to get wealthy … but there’s only one way to stay wealthy: some combination of frugality and paranoia.”

• “Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.“
• “If I had to summarize money success in a single word it would be ‘survival.'”
• “Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking a 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.”
• “The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career, or a business you own. There are two reasons why a survival mentality is so key with money. One is obvious: few gains are so great that they’re worth wiping yourself out over. The other is the counterintuitive math of compounding. Compounding only works if you can give asset years and years to grow.”
• “More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.”
• “Planning is important, but the most important part of every plan is to plan on the plan not going according to plan … Many bets fail not because they were wrong, but because they were mostly right in a situation that required things to be exactly right. Room for error—often called the margin of safety—is one of the most underappreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline—anything that lets you live happily with a range of outcomes.”
• “A barbell personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.”

3. Tails, You Win

“A lot of things in business and investing work this way. Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.“

• “That can be hard to deal with, even if you understand the math. It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.”
• “Anything huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to are the result of a tail, it’s easy to underestimate how rare and powerful they are.”
• “A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy. Tails drive everything.“

4. 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.“

• “The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today.’ People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives.”
• “More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.“
• “Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time. To obtain, bit by bit, a level of independence and autonomy that comes from unspent assets that give you greater control over what you can do and when you can do it.”
• “Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.”
• “Aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return.”
• “Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals. Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.”

5. Man in the Car Paradox

“No one is impressed with your possessions as much as you are.”

• “There is a paradox here: people tend to want wealth to signal to others that they should be liked and admired. But in reality, those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.“
• “It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goals, be careful how you seek them. Humility, kindness, and empathy will bring you more respect than horsepower ever will.“

6. Save Money

“Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.”

• “Independence, at any income level, is driven by your savings rate.” (Note: See FIRE (Financial Independence Retire Early))
• “Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.”
• “Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.”
• “Learning to be happy with less money creates a gap between what you have and what you want—similar to the gap you get from growing your paycheck, but easier and more in your control. A high savings rate means having lower expenses than you otherwise could, and having lower expenses means your savings go farther than they would if you spent more.”
• “Spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money. Think of it like this, one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility. When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little.”
• “Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.”
• “You don’t need a specific reason to save … You can save just for saving’s sake. And indeed you should. Everyone should.”
• “Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate.””
• “Having more control over your time and options is becoming one of the most valuable currencies in the world.”
• “Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see.”

7. No One’s Crazy

“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world 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.”
• “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.”
• “In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time. But that’s not what people do. The economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation—especially experiences early in their adult life.”
• “Their view of money was formed in different worlds. And when that’s the case, a view about money that one group of people thinks is outrageous can make perfect sense to another.”
• “Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting. Places where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together into a narrative that works for you.”

8. Luck & Risk

“Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.”

• “They are driven by the same thing: 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 line between ‘inspiringly bold’ and ‘foolishly reckless’ can be a millimeter thick and only visible with hindsight. Risk and luck are doppelgangers.”
• “Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. Or, just be careful when assuming that 100% of outcomes can be attributed to effort and decisions.”
• “Therefore, focus less on specific individuals and case studies and more on broad patterns.”
• “Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong. Because it’s never as good or as bad as it looks.“
• “You should like a risk because it pays off over time. But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time.”

 9. When You’ll Believe Anything

“Stories are, by far, the most powerful force in the economy. They are the fuel that can let the tangible parts of the economy work or the brake that holds our capabilities back.”

• “The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.”
• “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.”
• “Incentives are a powerful motivator, and we should always remember how they influence our own financial goals and outlooks. It can’t be overstated: there is no greater force in finance than a room for error, and the higher the stakes, the wider it should be.”
• “Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.”
• “Wanting to believe that we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control.“

10. The Seduction of Pessimism

“Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.”

• “Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.”
• “Money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.”
• “Pessimists often extrapolate present trends without accounting for how markets adapt.”
• “Progress happens too slowly to notice, but setbacks happen too quickly to ignore.”
• “It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together.”