The Psychology Of Money

A book that totally change my perspective on money.


5/18/202312 min read

Today, I'm excited to share with you a book that completely transformed my perspective on money.

The Psychology of Money is not your typical financial guidebook, but rather a fascinating exploration of the psychological aspects that shape our thoughts, feelings, and actions when it comes to finances.

The author, Housel, has masterfully crafted this book to be engaging and relatable by weaving in captivating stories and historical insights that provide a glimpse into the reasons behind our financial behaviors.

We humans like to think we're these logical beings, but when it comes to money decisions, emotions tend to rule the roost. Morgan brilliantly points out all the crazy biases, heuristics, and emotional roller coasters that influence our money mojo. It's like shining a flashlight on why we do silly or counterproductive things with our dough.

Covering a wide range of topics related to the psychology of money, this book delves into everything from our financial beliefs and attitudes to the behavioral biases and cultural influences that impact our financial lives.

What sets this book apart is its remarkable ability to explain complex concepts in a clear and accessible manner. Even if you're like me and don't have a background in psychology or finance, you'll find this book incredibly easy to grasp.

So, grab yourself a copy of this mind-altering book and prepare to have your relationship with money turned upside down. Morgan's got your back, making psychology and finance feel like a breeze. Who knew diving into the world of money could be so darn entertaining?

Happy reading, fellow aspiring Buffets!

Book In Three Sentences

  • Doing well with money is not about how much you know but about how you behave.

  • Money management involves self-awareness, long-term thinking, and aligning financial decisions with personal values.

  • True wealth lies not only in monetary gains but also in living a purposeful, fulfilling life.

How It Changes Me

  • Reflecting on my desires for certain things like a bungalow and a nomad lifestyle, I've come to question the underlying motivations behind them. I've realized that my inclination towards such aspirations stemmed more from a desire to show off and seek admiration rather than genuine personal fulfillment. Now, I find myself gravitating towards a more modest and contented life, cherishing time spent with my family and striving for financial freedom. I no longer feel the need to pursue extravagant experiences or constant travel.

  • In the past, I couldn't quite articulate why I always had a strong inclination towards saving and avoiding debt. Conventional financial advice often suggests leveraging low-interest debt for higher returns, but now I understand that the cold logic of potential gains pales in comparison to the liberating feeling of being debt-free and having a solid safety net.

  • As I delve deeper into the subject, I gain a greater appreciation for the diverse approaches people take in managing their finances. There are no rigid, one-size-fits-all rules for financial management. Numerous factors, such as the era we were born in, our ethnicity, our environment, internet exposure, education, and upbringing, all shape our perspectives and decisions. It's a nuanced and individual journey, influenced by a myriad of personal circumstances and experiences.

Top 3 Favorite Quotes

  • The most important part of every plan is planning on your plan not going according to plan.

  • Becareful who you praise and admire, Becareful who you look down upon and wish to avoid becoming.

  • Historians are not prophets.

Summary + Footnotes

Chapter 1: No One’s Crazy

Our thoughts on money are as diverse as the flavors at an ice cream parlor. Our individual biases and experiences contribute to this diversity.

Housel skillfully juxtaposes the contrasting experiences of the average American during the Great Depression with the privileged upbringing of President J.F. Kennedy in the 1930s.

While many Americans faced unimaginable hardships and financial struggles during that tumultuous time, Kennedy's affluent background shielded him from the worst of the economic turmoil.

There's no instruction manual on how to think about money, so we're all just stumbling through the financial maze like blindfolded cats.

What truly matters is that we remain true to our own values and strive for consistency in our financial decisions. By aligning our actions with our personal principles, we can cultivate a healthy and authentic relationship with money.

Chapter 2: Luck & Risk

Luck and risk are like the mischievous twins of the financial world, always up to some shenanigans. They're like the dynamic duo that determines how wealthy or broke we end up.

Often, we overlook the profound impact these elements have on our successes and failures, as we tend to fixate on personal decisions and efforts alone. It's important to zoom out and study the broader patterns and trends instead of solely focusing on individual stories.

By understanding the interplay of luck and risk at a larger scale, we can gain a deeper appreciation for the complexities of financial outcomes.

Chapter 3: Never Enough

gold and black car hood ornament
gold and black car hood ornament

In this vast world, there will always be those flaunting a flashier lifestyle and earning more than you can count on your fingers and toes.

But here's the kicker: even those ridiculously wealthy folks can lose their marbles if they can't find contentment with what they already have. It's like a game of financial Jenga, where the desire to be a billionaire when you're already swimming in millions can push people to play risky and sometimes even sketchy moves.

The true financial skill lies in finding contentment with what we have, in keeping the goalpost steady rather than constantly moving it further away. It's about recognizing that our worth isn't solely defined by the numbers in our bank accounts, but by our ability to appreciate and find fulfillment in the present.

Chapter 4: Confounding Compounding

Warren Buffett, the investing wizard who's showered with accolades left and right.

But hey, here's a little secret that often gets overlooked (and Housel unveiled it): the man started his investing journey when most of us were still figuring out how to tie our shoelaces. Yep, at a tender age of 10, he dipped his toes into the investing pool.

Now, let's not get too carried away with the "greatest returns" hype. Sure, they were good, but not mind-blowing (roughly 22% annually). But he had the advantage of time on his side. In fact, an astounding $81.5 billion out of his $84.5 billion net worth was accumulated after his 65th birthday.

This highlights the power of long-term investing and the compounding effect that comes with patiently nurturing one's investments over time. It serves as a reminder that starting early and staying the course can lead to extraordinary financial achievements in the later stages of life.

Chapter 5: Getting Wealthy vs Staying Wealthy

In the realm of the rich and famous, there's no shortage of tales where multimillionaire celebrities and top athletes find themselves pointing fingers at their account managers, accusing them of "botching" their finances or worse, ending up flat broke due to their own extravagant splurges.

The author emphasizes that preserving wealth requires a steady hand, a dose of financial savvy, and a knack for thinking ahead.

It's less about making big financial wins every time and more about avoiding detrimental mistakes that can jeopardize one's financial well-being.

So, let's focus on maintaining a steady course, making wise decisions, and steering clear of financial blunders to safeguard our wealth.

Chapter 6: Tails, You Win

"If you take away a handful of Berkshire's top investments, its overall performance would appear quite average." by Charlie Munger.

Such is the reality of life—every endeavor we undertake comes with its fair share of risks, and we often stumble more than we stride. However, it's worth noting that those rare moments of success tend to outweigh our losses by leaps and bounds.

Housel outlined this fact with examples of how Walt Disney made losses for most of their but a few successful productions to thrive.

So, what's the lesson we can glean from this?

Keep pushing forward, continually assess risks, and remain steadfast in pursuing our long-term objectives. By doing so, we enhance our likelihood of achieving favorable outcomes in the end.

Chapter 7: Freedom

photo of man about to jump from cliff
photo of man about to jump from cliff

In the wise words of Angus Campbell, "Having a strong sense of control over one's life holds greater significance in determining overall well-being than any external circumstances we've examined."

Housel shared that money's true power lies in its capacity to grant us control over our time.

It affords us the freedom to make personal choices and exercise autonomy. Instead of viewing money as a mere pursuit, let us recognize it as a tool for liberation, enabling us to live life on our terms.

It's not about the accumulation of wealth for its own sake, but rather embracing money as a means to unlock the doors of freedom and fulfillment.

Chapter 8: Man in the Car Paradox

"No one swoons over your possessions quite like you do," and it's a hard truth to swallow.

We daydream about bigger houses, flashy cars, fancy watches, and those envy-inducing exotic vacations, hoping they'll make us irresistible and incredibly popular. But here's the plot twist: most people don't really give a hoot about the person behind the possessions.

When they see those shiny toys, they're too busy imagining themselves in the driver's seat or lounging on a tropical beach.

The owners themselves become background noise.

So, if you're yearning for admiration and likability, skip the materialistic pursuits and focus on being an all-around good human being. Because let's face it, being kind, genuine, and hilarious will get you way more likes and followers in the game of life than any fancy gadget or designer bag ever could.

Chapter 9: Wealth is What You Don’t See

Having a truckload of possessions doesn't automatically crown someone as a financial guru. Appearances can be deceiving, especially when it comes to wealth.

We can't possibly know if they're drowning in debt, have a solid investment portfolio, own valuable assets, or even have much left in their bank account. All these crucial aspects remain invisible to us.

Yet, here we are, trying to gauge someone's wealth based on superficial glimpses.

But here's the truth: true wealth lies in the money not spent. It's the discipline of managing one's resources wisely, prioritizing financial security over material extravagance.

Chapter 10: Save Money

While we may not have full control over our income, there's one thing we can definitely put our superhero capes on: saving money. The funny thing is, wealth isn't determined by how much we earn or invest, but rather by our savings rate.

Accumulating a substantial savings nest egg grants us a sense of independence, shielding us from the uncertainties of the economy and allowing us to avoid risky financial decisions.

It also provides us with the freedom to weather losses without feeling trapped, and seize opportunities with potentially higher returns.

Chapter 11: Reasonable > Rational

golden retriever lying on blue textile
golden retriever lying on blue textile

When it comes to money, humans have a knack for turning into wonderfully irrational creatures. Fear and greed come waltzing into the picture, throwing a wild party that leaves our rational thinking in tatters.

We can't help but feel a surge of stress when our investments plummet by a whopping 50%, even if deep down we believe they'll eventually bounce back. This becomes even more challenging when that money represents our entire financial safety net.

Housel argues that most financial advice, while sound on paper, doesn't always align with our messy, emotional nature. We're not robotic beings wired for cold, logical decision-making.

We're beautifully flawed, emotionally-driven creatures. So, forget about chasing that elusive logical return.

Instead, focus on making investments that put a smile on your face and give you that warm, fuzzy feeling inside. It's all about finding the right balance between financial sense and emotional sanity.

Chapter 12: Surprises!

The world is full of surprises, and Housel's favorite mantra in this chapter perfectly captures it: "Historians are not prophets."

It's a reminder that we can't accurately predict the present or future solely based on past events. Take a moment to think about all those game-changing events and larger-than-life personalities that caught us off guard.

From the unexpected births of Adolf Hitler, Albert Einstein, Mao Zedong, Bill Gates, and Steve Jobs to world-shaking moments like 9/11, World War II, The Manhattan Project, and the fall of the Soviet Union, the history books were left scratching their heads.

Relying on past references alone for making financial decisions may not serve us well in an ever-changing world. Instead, it's important to embrace the uncertainty and be open to adapting our strategies accordingly.

Chapter 13: Room for Error

When it comes to our financial plans, many of us forget to leave room for error. It's like tightrope walking without a safety net—an unnecessary risk.

Housel suggests that by giving ourselves room for error (usually savings), we can weather a variety of potential outcomes and increase our endurance in the financial marathon. After all, life loves throwing curveballs, and the future is about as predictable as a squirrel on a sugar rush.

So, let's avoid those single points of failure and build a solid foundation of resilience. With a cushion of safety, we can confidently navigate the twists and turns, and even embrace those low-probability events that may turn out to be our golden ticket.

It's all about playing the long game and giving ourselves the best odds of success.

Chapter 14: You’ll Change

If you had asked me a decade ago if I'd become a stay-at-home dad, I would have thought you were out of your mind. And guess what? Life had a few surprises up its sleeve.

Similarly, after investing three solid years of my life studying information technology, I never expected to veer away from the IT field altogether.

Turns out, we're not exactly the best fortune tellers when it comes to predicting our future selves.

Housel explains that as we age, our perspectives shift, priorities change, and the world around us spins faster than a squirrel on caffeine. The key is to avoid falling into the sunken cost fallacy trap.

It's all about gracefully adapting our financial strategies and goals to align with the ever-changing circumstances and priorities that life throws our way.

Chapter 15: Nothing’s Free

Most stocks spend the majority of their time below their previous all-time high, even those with mind-boggling returns. It's like a game of financial hide-and-seek where losses seem to lurk around every corner.

But here's the silver lining: we're all in the same boat. No matter how skilled you are at investing, losses are just a part of the game. Housel advises us to think of it as a fee you pay for entry into the world of investing—an initiation of sorts.

So, instead of getting disheartened by occasional dips and downturns, let's embrace them as valuable lessons and stepping stones on our financial journey. Remember, even the most successful investors have had their fair share of setbacks.

Chapter 16: You And Me

Housel boldly challenges the notion that one-size-fits-all financial advice and investment strategies are the Holy Grail.

According to him, day-traders and individuals with short-term goals should have a distinct approach compared to the average person who's diligently saving for the long haul. And let's not forget about those so-called "experts" who often have their own agenda when dispensing financial advice.

Housel also delves into the fascinating concept of market "bubbles" and how they are a natural byproduct of trading. However, the real danger arises when long-term traders, driven by different objectives, start mimicking the behaviors of short-term day-traders.

It's a thought-provoking perspective that reminds us to carefully consider our individual goals and timelines when navigating the unpredictable waters of the market.

Chapter 17: Seduction Of Pessimism

Housel cautions us about the prevalent acceptance of pessimism, particularly in the realm of finance. It seems that negative news and dire predictions often garner more attention than optimistic perspectives.

However, Housel reminds us of a remarkable fact: despite enduring various financial crises throughout history, the stock market has grown a staggering 17,000 times over the last century when accounting for dividends.

This powerful statistic serves as a reminder that beneficial growth takes time, while destructive events can manifest as single points of failure.

Our inclination towards pessimism may stem from our tendency to focus more on negative information.

Housel's insights encourage us to balance our perspectives, appreciate the potential for long-term growth, and not allow temporary setbacks to overshadow the remarkable progress achieved over time.

Chapter 18: When You’ll Believe Anything

The author delivers a thought-provoking warning against the dangers of overconfidence.

It's fascinating how, while we may tend to be pessimistic about our financial futures, we can simultaneously become excessively self-assured in our decision-making.

It's a paradox indeed.

One humbling truth we often overlook is that we simply don't possess all-encompassing knowledge—we don't even know what we don't know. This knowledge gap leaves us operating in the blind, vulnerable to biases and an affinity for narratives that align with our desires rather than reality.

As a consequence, our decision-making becomes flawed and subject to errors.

It's a sobering reminder to embrace humility, remain open to new information, and acknowledge the limits of our own understanding. By doing so, we can navigate the financial landscape with greater prudence and make more informed choices.

Chapter 19 & 20 : All Together Now & Confessions

After a brief summary of the key ideas in the book, Housel opens up about his personal financial management approach, which centered around his core value of independence.

He prioritizes the freedom to make choices that align with his family's desires on their own terms.

To achieve this, he lives well below his means, avoids debt, and saves a significant portion of his income.

Housel emphasizes the importance of having a substantial cash reserve to handle unexpected expenses, ensuring that he doesn't have to sell stocks prematurely and can allow profits to compound over time.

His strategy reflects a long-term mindset aimed at maintaining financial flexibility and maximizing growth opportunities.

With this, we have finally ended the lengthly summary of this amazing book.

With love.