The Psychology of Money by Morgan Housel (Book summary)

In The Psychology of Money, Morgan Housel writes about the timeless lessons on wealth, greed, and happiness. Interestingly, doing well with money lies in how you behave. But behavior is hard to teach.

  • “Financial success is a soft skill, where how you behave is more important than what you know. This skill is called the psychology of money.”
  • “We need to understand about money like physics (with rules and laws) and with psychology (with emotions and nuance).”
  • Finance is guided by people’s behaviors.

Here are the takeaways from the stories in The Psychology of Money. These tips will help you make better sense of how to manage wealth and achieve happiness. For a more detailed summary, here is the link to my previous post.

  • 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.
  • Luck and risk are hard to identify. You’ll have a better chance of focusing on things you can actually control.  
  • Less ego, more wealth. Saving money is the gap between your ego and your income. Wealth is what you don’t see. It is created by suppressing what you could buy today in order to have more stuff or more options in the future.
  • Manage your money in a way that helps you sleep at night. To each their own. But asking, “does this help me sleep at night?” is the best universal guidepost for all financial decisions.
  • To do better as an investor, increase your time horizon. Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away. It can’t neutralize luck and risk, but it pushes you closer to the results you deserve.
  • Be ok even when a lot of things are going wrong. You can be wrong half the time and still make a fortune, because a small minority of things account for the majority of outcomes.
    • No matter what you’re doing with your money you should be comfortable with a lot of stuff not working out well. That’s just how the world is. So you should always measure how you’ve done by looking at your full portfolio, rather than individual investments.
    • It is fine to have a large chunk of poor investments and a few outstanding ones. That’s usually the best-case scenario. Judging how you’ve done by focusing on individual investments makes winners look more brilliant than they were, and losers appear more regrettable than they should.
  • Use money to gain control over your time, because not having control of your time is a drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.
  • Be nicer and less flashy. No one is impressed with your possessions as much as you are.  
  • You don’t need a specific reason to save. It’s great to save for what you want.
    • But saving for things that are impossible to predict or define is one of the best reasons to save. Everyone’s life is a continuous chain of surprises.
    • Savings that aren’t earmarked for anything in particular is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.
  • Define the cost of success and be ready to pay it. Because nothing worthwhile is free. And remember that most financial costs don’t have visible price tags.
    • Uncertainty, doubt, and regret are common costs in the finance world. They’re often worth paying. But you have to view them as fees (a price worth paying to get something nice in exchange) rather than fines (a penalty you should avoid).
  • Set aside the room for error. A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance.
    • Endurance is what makes compounding magic over time. Room for error often looks like a conservative hedge, but if it keeps you in the game it can pay for itself many times over.
  • Avoid the extreme ends of financial decisions. Everyone’s goals and desires will change over time, and the more extreme your past decisions were, the more you may regret them as you evolve.
  • You should like 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.
  • Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game.
  • Respect the mess. Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you.

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