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The Psychology of Money

Introduction

In The Psychology of Money, author Morgan Housel argues that when it comes to money, understanding human behavior is more important than understanding the mathematical details. According to Housel, most people assume that money follows a set of laws, the way physics or math does: If you understand the laws, you understand how money works and can achieve financial success. Therefore, people assume that financial success depends on education and intelligence.

However, Housel argues, neither math, intelligence, nor a knowledge of how markets work guarantees financial success. Rather, he contends, the key to financial success lies in understanding why humans behave the way we do. For example, if we all know that we should save 10% of our incomes, why do so few of us do it? When you understand not just the math but also the emotions and beliefs that influence your financial decisions, you can learn how to make better financial decisions.

Housel, a finance expert and former Wall Street Journal columnist, came to this conclusion shortly after the 2008 financial crisis. If money were as logical as people assumed, experts would have agreed on why the 2008 financial crisis happened. But Housel found that experts had competing theories and solutions—all of which were equally possible. Housel argues that the fact that several highly trained experts could all come up with equally plausible but competing theories about the 2008 crisis means that prior knowledge about finance doesn’t guarantee financial success.

Why Experts Don’t Agree

Housel seems to think that the fact that highly trained experts don’t agree on a single explanation is unique to finance. But there are several fields where experts disagree; for example, historians often present competing but equally plausible theories about why major events happened.

There is, however, a commonality between history and finance that may explain why experts disagree in both fields: Understanding both finance and history requires an intimate understanding of human behavior. As Housel notes, you can only understand finance if you understand how people’s emotions and beliefs influence their financial decisions; similarly, you can only understand history if you know why, generally, people made the choices that they did.

However, since human behavior is only predictable to a certain degree, there can be several different explanations of the same phenomenon that all make sense in both fields.

We’ve divided Housel’s discussions into seven parts:

In Part 1, we’ll discuss why people fail to achieve financial success.
In Part 2, we’ll explore the underlying reasons people desire money.
In Part 3, we’ll examine what to include in a financial strategy.
In Part 4, we’ll discuss how you can ensure that you’ll stick to your strategy over long periods of time.
In Part 5, we’ll look at how to counter negative thinking that can knock you off your strategy.
In Part 6, we’ll cover how you can pay attention to helpful information and ignore unhelpful information.
In Part 7, we’ll review some of the history that Housel believes has led to society’s current situation, where people have trouble properly managing their money.

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