The Psychology Of Money: Timeless Lessons On Wealth, Greed, And Happiness

Physical Copy:


By: Morgan Housel

Rating: A-

I saw this book on a bunch of top book lists and was curious about what it had to say about why people are so crazy with money. The book went through 20 principles that describe the psychology of money and then prescribed what to do with that.

My favorite takeaways were:

-Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. Your personal worldview is not necessarily an accurate view. 

-In order to have “enough”, you HAVE to stop comparing yourself to others. Comparison is the thief of joy and no one is as impressed by your possessions as much as you are. No one cares about your crap so put it in its place. Use things (money) and love people. Not the other way around.

Key Principles:

  1. No One’s Crazy: Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. Your personal worldview is not necessarily an accurate view. 
  1. Luck & Risk: Nothing is as good or as bad as it seems. “Someone else’s failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of risk.” Not all success is due to hard work, and not all poverty is due to laziness. Therefore, focus less on specific individuals and case studies and more on broad patterns.
  1. Never Enough: Have something the “rich” can never have…enough. 
  • The hardest financial skill is getting the goalpost to stop moving. Happiness is results minus expectations. THE problem is social comparison. Stop comparing yourself to others. 
  1. Confounding Compounding: $81.5 billion of Warren Buffet’s $84.5 billion net worth came after his 65th birthday. His skill is investing, but his secret is time. That’s how compounding works. Good investing isn’t necessarily about earning the highest returns. It is about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild. 
  1. Freedom: 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. 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.
  1. Man in the Car Paradox: No one is impressed with your possessions as much as you are.
  1. Wealth is What You Don’t See: Rich is current income. But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth. 
  1. Save Money:
  • Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
  • Past a certain level of income, what you need is just what sits below your ego.
  • Save to invest.
  1. Reasonable > Rational: You are not a spreadsheet. You’re a person. A screwed up, emotional person. Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money. 
  1. Room for Error: The most important part of every plan is planning on your plan not going according to plan. 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 favor.

Leverage is the devil here. Leverage – taking on debt to make your money go further – pushes routine risks into something capable of producing ruin.

  1. You’ll Change: Long-term planning is harder than it seems because people’s goals and desires change over time. There are two things to keep in mind when making what you think are long-term decisions.
  • We should avoid the extreme ends of financial planning. (Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one = Regret)
  • We should also come to accept the reality of changing our minds.
  1. You & ME: Investors often innocently take cues from other investors who are playing a different game than they are. Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term. Understand your own time horizon and don’t be persuaded by the actions of people playing different games than you are.
  1. The Seduction of Pessimism: Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. The simple idea that most people wake up in the morning trying to make things a little better and more productive than waking up looking to cause trouble is the foundation of optimism. Pessimism just sounds smarter and more plausible than optimism. Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention. 
  1. When You’ll Believe Anything:
  • The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
  • Coming to terms with how much you don’t know means coming to terms with how much of what happens in the world is out of your control. And that can be hard to accept.

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