Book Summary: The Psychology of Money-Morgan Housel

Doing well with money is a behavior, not a skill.

In a Nutshell:

1. Finance is one such area where your technical expertise won’t matter as much as your behavior.
2. When we consider anything that is related to money, we need to also include the psychological factors, goals and requirements of a person. There is no one size fits all solution in finance.
3. It’s statistically shown that people with more choices and control over their lives are happier. Saving money is one way to ensure that you have the ability to wait for better options, make an alternate career or spend more time with family.

Chapter Summary:

1. No one’s crazy — It appears to us that some people make the craziest decisions with money but it often isn’t the case. People appear to be that way because we’re all new to the game. Poor people buy more lottery tickets instead of saving for emergencies because they view it as an chance for uplifting from their present condition. Rich people buy extremely expensive things because it might be a status symbol for them. Each of them have their own story for doing what they do. It’s easier to judge people, but if we can look further we can get a glimpse of how people work.
2. Luck and Risk — These are the forces outside of individual effort that influence outcomes. A lot of times we can’t explain if we got lucky or we made a shrewd decision. Media always seems to focus on the extreme examples of people extremely successful or someone who failed spectacularly. Can we really distinguish what role did the individual’s effort play and what was luck? An important insight we can get from this — focus on patterns rather than individual case studies.
3. Never Enough — Knowing when to stop would ensure we don’t fall in the extreme scenarios. Goalposts keep changing for all of us and they should, but at some point it needs to stop. We need to question ourselves if the job that we’re killing ourselves for is really worth it just for the extra money. Does the option of having a lot of stuff offset the lack of time? How much time are we spending for ourselves and our families? Study — People with more control over their time and with more choices tend be happier.
4. Confounding Compounding — Compounding is the most powerful tool to get more returns. The key here is to give enough time for it to compound. Of Warren Buffett’s $81 billion, $80 billion came to him after he turned 65, and also because he started investing at a very young age.
5. Getting wealthy vs. Staying wealthy — You can be someone who is good at getting wealthy, but to stay wealthy you need to be consistent in your behavior. Getting money involves taking risks, and putting yourself out there but staying wealthy is the exact opposite- it requires acceptance that you can lose your money just as quickly, being frugal and taking lesser risks. This also gives you more freedom to make more money as you are financially sound and stick around longer for your plans to work. Staying wealthy includes allowing room for error, also called margin of safety.
6. Tails, You Win — We underestimate how normal it is for a lot of things to fail, which causes us to overreact when they do. One of the key example is the stock markets — they have been innumerable losses but in the longer run, the market has consistently gone up. The point here is that even if you’re wrong more than half of the times, you can still end up rich by continuing what you do. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.
7. Freedom — Controlling your time is the highest dividend money pays. It’s statistically proven that people are happier when they are the drivers of their life. Being financially sound helps us make decisions that are not controlled by the urge to make money, it would give us more choices in life and hence more freedom.
8. Man in the Car Paradox — No one is impressed with your possessions as much as you are. We have to re-look at how much material possessions benefit us psychologically. Do they really bring us respect?
9. Wealth is What You Don’t See — Judging someone by how much they spend is not a good estimate, there’s usually more than what meets the eye. We usually believe that spending money shows that we’re wealthy but it is also the fastest way to lose it.
10. Save Money — People usually have goals for which they save money, but you don’t always need a goal to save money. Making a habit of saving also has a benefit of making you learn how to be happy with less. Saving without a goal also means that you’ll be prepared to deal with whatever surprises life throws your way. It buys you more freedom to experiment with what you want to do in life.
11. Reasonable > Rational — Aiming to be mostly reasonable works better than trying to be coldly rational. Being reasonable is having a range of targets and allowing for change. Being rational is good in theory but in practice it usually doesn’t work all the time because it ignores the emotional aspects of the situation.
12. Surprise! — We study history to predict what the future looks like, but ironically, history is the study of change that wasn’t predicted. The lesson we need to learn from history is that the world is surprising, and your takeaways should be general trends. One useful way — estimate you might get 1/3 or 1/4 less than the historical averages and save accordingly. If you’re right, you’d have saved for it, else you’d have more!
13. Room for Error — Don’t have single points of failure (If a lot of things rely on one thing working, and that thing breaks, it’s a single point of failure) Always have backups for your plans.
14. You’ll Change — Understand that you’ll change, accommodate enough so that you’re not ending up in extreme scenarios where you’ll upend your whole plans.
15. Nothing’s Free — Volatility, fear, uncertainty are the fee you have to pay for the magic of compounding to work.
16. You and Me — When investing in the stock market we have to bear in mind that there are majorly two kinds of investors — short term and long term. You have to be aware that you’re taking cues from the kind of investor that you are. If you’re a long term investor and take cues from a short-term one, you’ll be tempted to act the way they do. Bubbles are a result of time horizons shrinking and more short-term players entering the field.
17. The Seduction of Pessimism — Pessimism sounds smarter and more plausible than optimism. Evolutionarily, we treat threats as more urgent than opportunities. This gives us a better chance to survive and reproduce. However, we need to understand that growth is driven by compounding, which takes time.
18. When You’ll Believe Anything — Be aware of the financial fiction spun by the people around you. Everyone has an incomplete view of the world, but we form a complete narrative to fill the gaps and satisfy the illusion of control.