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Most of us assume financial success depends on education and intelligence. But in The Psychology of Money, finance expert Morgan Housel presents an alternate hypothesis: The key to financial success lies in understanding human behavior. Housel posits that when you understand how emotions and beliefs influence your financial decisions, you’ll make better financial decisions.
In this guide, you’ll learn why people fail to achieve financial success and why you want money. You’ll also learn what to include in your financial strategy, how to create one you can follow for decades, how to follow it through those decades—and how to pay attention to the information you need to do so.
Money is ubiquitous—so why do so few people master it? Housel posits two major reasons: We underestimate the role of chance in financial success, and we confuse being wealthy with being rich.
Housel suggests one reason we fail to become financially successful: We underestimate the role chance plays in our financial lives. For example, we forget Bill Gates was successful not just because he was intelligent but also because he got lucky: He was (literally) one in a million teenagers who had access to a school computer in 1968. (Shortform note: In Fooled by Randomness, former trader Nassim Nicholas Taleb adds that when you succeed matters: Early success helps determine subsequent success because winning an early random advantage positions you to win subsequent random advantages. Microsoft may have succeeded partly because Gates got an early advantage through chance contracts and positive feedback.)
Housel contends our ignorance of chance is dangerous because many people try to gain wealth by imitating the most exceptionally successful people—but thanks to chance, copying what they did often doesn’t lead to success. As Housel notes, the more exceptional the story, the more likely luck played a bigger role in its outcome. So the more exceptional the story, the more unique it is and so the less likely you are to be able to learn lessons from it.
Instead, Housel recommends that you pay attention to patterns, not people. If many wealthy people did Thing A to get wealthy and only one wealthy person did Thing B, it’s more probable doing Thing A will make you wealthy. (Shortform note: Taleb warns that while you can gain moderate success by following the patterns of the wealthy, you’re unlikely to get wild success—millions of dollars and lasting fame—without luck: a positive rare event plus few negative rare events. Just because something (like a certain pattern of behavior) is necessary for wild success doesn’t mean it caused wild success.)
Housel pinpoints another reason we fail to achieve financial success: We confuse being wealthy with being rich. He explains that if you’re wealthy, you have a lot of money in the bank. In other words, wealth is money you’re not using but could use if you wanted to. But if you’re rich, your current income is high: You have money you’re able to spend on expensive items.