The Psychology of Money

April 11, 2022 11 minute read

What It’s About

The Psychology of Money is one of the those books that lays the fundamentals required for investment and saving your money without pushing and punishing with a lot of jargons, technical terms, and read-the-offer-documents-carefully-before-investing kind of mundane warnings. The book speaks in a very clear manner, chapters being crisp and brief, in a language which is assertive with a lot of understanding of the psychology of an individual average investor/human who wants to secure the future.

How I Discovered It

This book intantly goes to my reading list after I see best book chapter in Amazon 2020 highlight

My Thoughts

I would categorize this book as The book that changed my financial life, or at least how I look financial. This book gives me 4 cores about $

Attitudes towards $
Getting $
Spending $
Protecting $

Who Would Like It?

This was a short but enjoyable read. The main point is that we are complicated creatures who have complicated relationships with money. It’s ok and expected to not base every decision off of cold Excel calculations.

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The Psychology of Money

Morgan Housel

Last accessed on Thursday December 2, 2021

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“A genius is the man who can do the average thing when everyone else around him is losing his mind.” —Napoleon

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“The world is full of obvious things which nobody by any chance ever observes.” —Sherlock Holmes

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The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.

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A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.

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One, financial outcomes are driven by luck, independent of intelligence and effort. That’s true to some extent, and this book will discuss it in further detail. Or, two (and I think more common), that financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.

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stories to convince you that soft skills are more important than the technical side of money.

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I love Voltaire’s observation that “History never repeats itself; man always does.” It applies so well to how we behave with money.

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People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.

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We all think we know how the world works. But we’ve all only experienced a tiny sliver of it.

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“some lessons have to be experienced before they can be understood.”

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My aunt worked several years in what Americans call “sweat shops.” It was hard work. Long hours, “small” wage, “poor” working conditions. Do you know what my aunt did before she worked in one of these factories? She was a prostitute. The idea of working in a “sweat shop” compared to that old lifestyle is an improvement, in my opinion. I know that my aunt would rather be “exploited” by an evil capitalist boss for a couple of dollars than have her body be exploited by several men for pennies. That is why I am upset by many Americans’ thinking. We do not have the same opportunities as the West. Our governmental infrastructure is different. The country is different. Yes, factory is hard labor. Could it be better? Yes, but only when you compare such to American jobs.

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We all do crazy stuff with money, because we’re all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy—we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

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Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

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Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

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Therefore, focus less on specific individuals and case studies and more on broad patterns.

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Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

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

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1. The hardest financial skill is getting the goalpost to stop moving.

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Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.

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2. Social comparison is the problem here.

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3. “Enough” is not too little.

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4. There are many things never worth risking, no matter the potential gain.

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Reputation is invaluable.

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Freedom and independence are invaluable.

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Family and friends are invaluable.

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Being loved by those who you want to love you is invaluable.

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But good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.

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Capitalism is hard. But part of the reason this happens is because getting money and keeping money are two different skills.

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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.

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Nassim Taleb put it this way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.”

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1. More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.

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2. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

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A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes room for error. The more you need specific elements of a plan to be true, the more fragile your financial life becomes.

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3. A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.

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If you want safer, predictable, and more stable returns, you invest in large public companies.

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Remember, tails drive everything.

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When you accept that tails drive everything in business, investing, and finance you realize that it’s normal for lots of things to go wrong, break, fail, and fall.

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There are 100 billion planets in our galaxy and only one, as far as we know, with intelligent life.

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THE HIGHEST FORM of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”

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The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

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Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.

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The hardest thing about this was that I loved the work. And I wanted to work hard. But doing something you love on a schedule you can’t control can feel the same as doing something you hate.

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There is a name for this feeling. Psychologists call it reactance.

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We’re constantly working in our heads, which means it feels like work never ends.

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What they did value were things like quality friendships, being part of something bigger than themselves, and spending quality, unstructured time with their children. “Your kids don’t want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them,” Pillemer writes. Take it from

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The letter I wrote after my son was born said, “You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it.

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Humility, kindness, and empathy will bring you more respect than horsepower ever will.

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But the truth is that wealth is what you don’t see.

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Wealth is financial assets that haven’t yet been converted into the stuff you see.

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The only way to be wealthy is to not spend the money that you do have.

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Past a certain level of income, what you need is just what sits below your ego.

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So people’s ability to save is more in their control than they might think.

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Savings can be created by spending less.

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And you don’t need a specific reason to save.

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You can save just for saving’s sake. And indeed you should. Everyone should.

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

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“the purpose of the margin of safety is to render the forecast unnecessary.”

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assume the future returns I’ll earn in my lifetime will be ⅓ lower than the historic average. So I save more than I would if I assumed the future will resemble the past. It’s my margin of safety.

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Everything has a price, but not all prices appear on labels.

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Find the price, then pay it.

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Appealing fictions, and why stories are more powerful than statistics.

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Manage your money in a way that helps you sleep at night.

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If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.

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Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune,

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Use money to gain control over your time,

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Save. Just save. You don’t need a specific reason to save. It’s

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Define the cost of success and be ready to pay it. Because

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You should like risk because it pays off over time.

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Charlie Munger once said “I did not intend to get rich. I just wanted to get independent.”

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