The Psychology of Money

In The Psychology of Money, Morgan Housel explores how money moves around in an economy and how personal biases and the emotional factor play an important role in our financial decisions.

Instead of pretending that humans are ROI-optimizing machines, he shows you how your psychology can work for and against you.

My impressions

Has someone who always wants to control things, this book helped me to see the world in another way, but also think differently about money.

Why?

Because in this book, he talks about concepts we tend to forget when it comes to money, like luck, being rich vs wealthy and the investing game impact on our health.

I think this book can be a life changer for someone who wants to improve his financial skills or simply wants to strengthen his knowledge.

How I Discovered It

I discovered this book when I was looking for financial videos on YouTube and I fell by chance on one video that the YouTuber Ali Abdaal done about this book. After that few days later I decided to give a try and ordered it from the Apple Books app.

And guess what? It’s a must-read ! ⭐️️️️️⭐️️️️️⭐️️️️️⭐️️️️️⭐️️️️️

Who Should Read It?

If you’re a 30-year-old person who feels like you’re behind with your finances and want to get out of that situation, this book is for you.

If you’re a 45 years old “coach” of some financial topic who wants to dive deeper and sharp his knowledge to better help your client, get this book.

Even if you’re a young 20 years old economic student who would like to expend on their study materials, this book is definitively for you.

How this book impacted me

• It makes me more understanding the dividends-based investments.
• It shows me another vision of saving, and why it’s always a good idea to save money, even if you don’t know why.
• I think I will go for more books on finance topic, because of that one.

Highlights and Notes

Luck and risk
It’s easy to convince yourself that your financial outcomes are determined entirely by the quality of your decisions and actions, but that’s not always the case.

You can make good decisions that lead to poor financial outcomes. And you can make bad decisions that lead to good financial outcomes. You have to account for the role of luck and risk.

The role of individual effort in determining outcomes

1. Be cautious about the people who you admire and look down upon. Those at the top may have been the benefactors of luck, while those at the bottom may have been the victims of risk.
2. Focus less on individuals, and turn your mind to broader patterns. It’s difficult to replicate the outcomes of successful individuals, but you may be able to participate in broader patterns.

“But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.”

Be kind to yourself when you make a mistake or end up on the wrong side of risk. The world is uncertain, and it may not be your fault if something goes wrong.

Lessons from Buffet
It’s easy to have a goalpost that keeps moving. Once you achieve your goals, you look toward the next goal. And the cycle never ends.

This is often driven by comparing yourself to others, and you’re often comparing yourself to someone who is above you in the ladder that you benchmark yourself against.

When it comes to money, someone will always have more of it than you. That’s okay. It’s fine to pursue more money, but don’t start making risky bets that put what you have at risk for something that you don’t need.

“There is no reason to risk what you have and need for what you don’t have and don’t need. — Warren Buffett

Cash is not the enemy
If you’re relatively young and earn more than you spend, the best way to optimize your long-term investment returns is to invest the majority of your money into a diversified portfolio of low-cost index funds.

Holding more than a few percentage points of your net worth in cash is silly because the value of cash erodes with inflation, and that cash can otherwise be put into assets like stocks that historically have compounded at a rate of 6-7%.

“A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality”

Getting money vs Keeping Money
Getting money and keeping money are two distinct skills. While getting money necessitates risk taking, hard word, and an optimistic disposition, keeping money is a different skill.

It requires you to mitigate risk, avoid getting greedy, and to remember that things can be taken from you at any moment.

“Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking 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.”

Theory isn’t the reality
As much as reading can inform us about what has happened in the past, like stock market crashes or how stocks have trended up and to the right over time, learning about something in a book is very different from actually experiencing the event. So be careful.

You may think that you can hold your stocks during a 30% market downturn because you know that only suckers sell at the bottom, but it’s only when you experience that type of downturn that you’ll learn what you’ll do.

“The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.”

Man in the car paradox
People buy mansions and fancy cars because they want respect and admiration from others. What they don’t realize is that people don’t admire the person with the fancy house or car; they admire the object and think of themselves having that object.

So buying impressive items to gain admiration and respect from others is a fool’s pursuit – these things can not be bought.

Ferraris don’t generate respect

Leave room for error
A big gap in most people’s understanding of room for error is accepting that there is a difference between what you can technically endure vs. what you can emotionally endure.

So if you don’t account for your emotions in your models, you may end up in suboptimal situations.

“Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favour.”