The Psychology of Money by Morgan Housel – 19 Fascinating Lessons

Have you ever wondered why you behave a certain way with money? Why do you make the decisions you do? Do you shake your head at financial decisions others make?

Money is complex. It comes with emotions, whether you care to admit it or not. And, those emotions influence your decisions – for better or worse.

I love where psychology and money meet. It’s messy. And in a world where we want black and white answers, behavioral finance attempts to make sense of what feels like a giant grey zone. I find it fascinating.

Behavioral finance helps explain why we do what we do. It takes those questions of, “Why on earth would I do that?” and gives it meaning.

One of my favorite writers, Morgan Housel, writes regularly on the topic of psychology and money. I am very excited to share his work with you!

The BookThe Psychology of Money: Timeless lessons on wealth, greed and happiness

If you have never heard of Morgan Housel, I highly recommend reading his writing. He blogs regularly at the Collaborative Fund.  

He has a unique ability to take complex financial concepts and break them down into understandable life lessons, while weaving in history lessons. Not a week passes where I don’t look forward to reading his work. 

He recently published his first book, The Psychology of Money: Timeless lessons on wealth, greed, and happiness.

It was everything I expected. When people ask for a book about finance and investing, I am going to recommend this book. It won’t teach you what to do with your money, but it will teach you how to think about money.

And, you’ll love the outrageous money stories Morgan shares.

I didn’t go into the book looking for lessons. I was looking forward to reading it because I love his writing. I love it because I almost always learn something about history, am challenged to think about my own life, and am amazed by his ability to make the complex understandable and simple.

For those wanting to read the book, I gave it grades below based on a few different factors. 

Informative: A+

Entertaining: A+

Easy to Read: A+

Informative: Each chapter has something for you. If you don’t come away with at least one big lesson from the book, I have to assume you didn’t open it. I could have read this book again a week later and come away with something new. You’ll learn about history, such as mice helping defeat the Germans. You’ll learn about psychology. More importantly, you’ll learn about money and how it relates to your life.

Entertaining: Morgan is entertaining. He tells stories about his time as a valet, wealthy people skipping $1,000 gold coins on the water, and humble stories of modest people with millions. You won’t be bored.

Easy to Read: The chapters are short and don’t need to be read in order. I recommend starting the book at the beginning, but you could pick up any chapter and start reading. Morgan makes his points and gets out of the way. “This book is 19 chapters. None are long,” says Morgan, “because I don’t want to waste your time.”

Lessons I Hope Stick with Me

The Psychology of Money

I wish all the lessons would stick with me. Being realistic, I will only internalize a handful. Later in the post, I’ll share my 19 takeaways from each chapter. But for now, I’ll reflect on the ones that I liked or surprised me the most.

No One’s Crazy

Most of the time, I think plenty of people are crazy. But, I’ll admit, Morgan has me second guessing myself.

We all have different information. We all grow up with different experiences. What we experience causes us to see and act in the world differently.

For example, have you ever met someone who grew up during The Great Depression? They tend to be extremely frugal, reuse items more than others, and keep money stashed in different places because of a distrust of banks. Most of us would look at the behavior of someone who experienced The Great Depression and consider it crazy, but it’s not.

Imagine if you lost everything during The Great Depression. You can start to see why they behave the way they do.

As much as you can imagine, until you actually live it, you’ll never completely internalize it and change your behavior. You don’t have the memories of hardship.

A good example between generations is inflation. I grew up in the 90s, which means I’ve never seen high inflation. I’ve studied it. I know people who were born in the 1960s and how gas lines were long, energy shortages existed, and interest rates increased. However, since I didn’t live it, that hasn’t shaped my behavior and my experience of the world as much as someone who lived it. I will likely always think about inflation differently than someone born in the 1960s. As we go through life, we will respond differently to the same information.

Morgan gives a great example in the book about lottery tickets. The people who buy them tend to be poor. It may seem crazy that the lowest-income households in the U.S. spend $412 on average each year on lotto tickets, but if you are not in the lowest income group, you don’t see the world the same way.

You may not know what it is like to not take vacations, go without health insurance, and scrape by each month. The lotto ticket may be the only thing that gives them the chance to dream for a better life. In that context, it may not be crazy.

Next time you see someone make a decision with money and consider it crazy, remember, no one’s crazy. We are all taking in information and making decisions based on our lived experiences. Money is emotional.

Luck and the Role it Plays in Life

Morgan wrote to his son after he was born:

But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.

The Psychology of Money, Page 33

Can we really tell skill apart from a lucky decision? Who knows. My guess is you know someone who is incredibly successful who you feel is unskilled, but lucky. You probably also know someone who you thought would be incredibly successful, but for whatever reason, seems to be the most unlucky person at every key point in life.

I’m not downplaying people’s hard work. It’s important to realize some risks are outside of our control. For example, I bet someone out there opened a business in March of 2020 with a really unique, hands-on, in-person experience. It could have been a music shop, restaurant or other business. It doesn’t matter. What does matter is COVID-19 happened, which likely changed their trajectory for the worst. It doesn’t mean they made a bad decision to launch a business. It just means they were incredibly unlucky.

It can go the opposite way with good fortune. Right place, right time sometimes.

Be skeptical with who you look up to or down upon.

Rich vs. Wealthy

This is a short one many people get wrong.

Rich is having a high income.

Wealth is hidden. It’s income not spent. It’s the ability to control your time. Wealth is what you don’t see, such as the higher investment portfolio from the less expensive house.

Reasonable is Better than Rational

I like to say there is an emotional and economic side of each decision. The emotional side can be thought of as reasonable. The economic side can be thought of as the rational.

For example, my mortgage interest rate is 3.05%. With a rate that low, economically, it makes no sense to pay it down more quickly than the 30 year term. Instead of paying it down more quickly, I know how I could take any extra payments I want to pay towards the mortgage, invest it in the stock market and likely end up wealthier. Historically, there is no 30 year period where I don’t come out ahead.

However, even knowing this information, I’ve made extra payments towards my mortgage. It’s not rational. In fact, it’s entirely irrational. That’s okay. It makes me feel good. Emotionally, it’s a win.

You don’t have to make every financial decision in the context of a spreadsheet. It may actually hurt you more. I think about people who diet – I’m about talking the people who are strict as can be. They follow the diet, eat things they don’t like, and never treat themselves. Rarely do I hear about them sticking with it long-term. Eventually, they break. I’ve noticed that people who follow a diet, but allow themselves treats within a reasonable framework, do better. It doesn’t make sense to eat an ice cream bar for healthy eating or to lose weight, but if it satisfies you enough to keep you on track, perhaps reasonable is better than rational.

You’re a human being. You’re emotional. Be okay with it.

Main Takeaways of The Psychology of Money – The Twitter Version

I tweeted my main takeaways from each chapter. They are copied below for you.

Ch1: Your lived experience will shape how you think and interact with the world. If someone does something that feels crazy, recognize their information is different from yours. Your decisions may appear crazy to someone else. Your personal experiences are an infinitesimal part of the world, but shape most of how you think about the world. Grew up with high inflation? Less money invested in bonds later. Born in 1990? Probably not worried about inflation. Money decisions are emotional. No one’s crazy.

Ch2: Luck and timing play a huge role in success. Focus on broad patterns of success and failure – not specific individuals. Bill Gates was incredibly lucky to grow up with a school that had a computer. Without it, who would he be today? We’ll never know. Judge others carefully.

Ch3: Figure out when you have enough. Know when it’s okay to stop taking risks. There will always be someone wealthier than you. And more than anything, know the things in your life that are never worth risking.

Ch4: Compounding only works with time. Time can be your secret to success. Buffett earned one third the returns of Simons, yet Simons is only 75% as rich as Buffett. The difference? Time. Good investing can be average returns repeatedly earned for a long time.

Ch5: Getting wealthy and staying wealthy takes different skills. The former requires risk. The latter requires humility and fear wealth can be taken away. Have a survivor mentality, but be optimistic about the future. Again, compounding only works with time.

Ch6: You can be wrong more than half the time and do well. Tails drive everything. Most companies in an index fund fall and never recover. It’s a handful of companies that drive most returns. How you behave during market declines is similar. Keep your cool when others go crazy.

Ch7: Money gives you control over your time. Wealth is waking up and choosing what you want to do each day. Elderly folks value friendships, time with children, and participating in projects bigger than themselves – these are the things that can make you happiest.

Ch8: Fancy things won’t make people respect and admire you. Nobody notices the person. They notice the fancy thing.

Ch9: Wealth is what you don’t see. It offers flexibility and options. Google Ronald Read. He was never rich, but very wealthy. Keep that in mind the next time you judge someone by what you see.

Ch10: Your savings rate is a key factor in building wealth. Not high investment returns. Be content with less. Don’t let your ego get in the way. You can save without a goal in mind. The savings will give you back a portion of your future instead of selling it to someone else.

Ch11: You are a human being with emotions. Don’t try to do everything that is rational. It might hurt you more. Aim to be reasonable. Even Jack Bogle, the founder of Vanguard, invested money in his son’s hedge funds. Rational? No. Reasonable? Absolutely.

Ch12: It’s okay to study history, but outlier events are going to drive the most change, and they will always surprise you. Nobody knows the future. Things change. The 401(k) didn’t exist 50 years ago. The farther back you look, the more general your takeaways should be.

Ch13: Leave room for error. It will help protect you from the surprises history can’t predict. Mice helped defeat the Germans. No tank designer ever thought about protection from mice. If you are wiped out, you can’t play the game. Save for goals, but also for no reason.

Ch14: Your desires will change. Be okay with undoing past plans and not knowing what you’ll want in the future. Avoid extreme planning – trying to get by with as little as possible or trying to earn as much as possible. It helps avoid future regret if you change your mind.

Ch15: Everything has a price. The price of good market returns is volatility and the pain that accompanies it. Think of volatility as a fee you pay – not a fine. It’s best to pay it. You can’t get fit without the pain of exercise. It works the same in markets.

Ch16: We all play different games with different time horizons. Don’t copy people. Day traders may buy stock at a certain price because they won’t own it the next day. That price may not make sense if you plan on holding it 20 years. Figure out your game.

Ch17: Pessimistic forecasts sound more plausible, but most people should be optimistic because over time, things get better for most people. Bad events happen quickly, grabbing attention. Progress happens slowly, unnoticed. Don’t fall into the pessimistic trap; markets adapt.

Ch18: Stories are powerful. They help drive the economy. It’s easier to believe a story if you want it to be true. You don’t know what you don’t know, which means you’ll create an explanation when you find something you don’t understand because you want it to make sense.

Ch19: Be compassionate, reduce your ego, save, manage your money in a way that works for you, use money to control your time, apply risk to get ahead, leave room for error, recognize things will go wrong, allow time to work in your favor, and know what game you’re playing.

Final Thoughts – Summary

This is a wonderful book. You should read it. That really is all the summary that’s needed.

I hope you enjoy it!

Disclaimer: This article is for general information and educational purposes only and should not be considered investment, financial, legal, or tax advice. It is not a recommendation for purchase or sale of any security or investment advisory services. Please consult your own legal, financial, and other professionals to determine what may be appropriate for you. Opinions expressed are as of the date of publication, and such opinions are subject to change. Click for Full Disclaimer

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