Book Summary: The Psychology of Money by Morgan Housel

Key Takeaways from The Psychology of Money

• How to be successful with money:
  • It’s more about psychology and behaviour than being smart.
  • Aim to be reasonable, not rational — what matters is what helps you sleep at night, not what is optimal in theory.
  • The key steps involve:
    • saving (even if you don’t have a particular goal);
    • investing for the long-term; and
    • surviving.
  • Know what game you’re playing and be wary of taking cues from others. Everyone thinks about money differently, based on their own experiences.
• The future is highly uncertain:
  • It’s hard to understand the past, because luck plays a role in outcomes—and a bigger role in cases of extreme success or failure.
  • It’s harder to predict the future because what surprises us keeps evolving over time. (But some basic features of human psychology are pretty stable.)
  • It’s even hard to predict what you will want in the future because people change over time.
• How to deal with uncertainty:
  • The good news is you can be wrong half the time and still make a fortune.
  • Build in a margin of safety to increase your chances of staying in the game.
  • Avoid risk of ruin — be wary of leverage and single points of failure. And don’t risk things that aren’t worth risking, like your reputation or freedom.
  • Stay away from extremes to minimise your chance of regret.
• The value of wealth:
  • Wealth won’t make people like or respect you. Wealth is what you don’t see—the financial assets that haven’t been converted into tangible things.
  • The real value of wealth is flexibility and control over your time.

Detailed Summary of The Psychology of Money

How to be successful with money

It’s more about psychology and behaviour than being smart

Doing well with money is not about what you know, but how you behave. In finance can someone with no college degree, formal experience or connections and massively outperform another person with the best education, training and connections.

Example: The wealthy janitor vs the bankrupt MBA

Ronald Read, a humble janitor, died at the age of 92 with around $8 million. He hadn’t won the lottery or received a big inheritance. He’d just been a diligent saver and invested in blue chip stocks over a long time.

On the other hand, Richard Fuscone was a finance executive with a Harvard MBA, who seemed to have all the advantages Read didn’t. Fuscone had become so successful that he retired in his 40s to become a philanthropist. But he also spent big—his mansion cost more than $90,000 a month to maintain. He was bankrupted in the 2008 financial crisis.

Behaviour is greatly underrated and hard to teach, even to smart people.

Aim for reasonable, not rational

You are a person with emotions. So don’t try to make the decisions that would be optimal for an emotionless robot, but which cause you to lose sleep at night. Aim for decisions that are just “reasonable”, which you can stick with in the long-run. A strategy that works in theory, but requires you to stick with it even if you lose 100% of your savings, is not reasonable.

Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting.— Morgan Housel in The Psychology of Money

It’s helpful to think of market volatility as a price or fee. High returns do not come for free—its price is high volatility and risk. You can pay this price by accepting the volatility, or you can find an asset with less risk and a lower pay-off. Trying to get high returns without the volatility (e.g. by timing the market) is like trying to steal a car. A few get away with it. But far more do not, and end up worse off. If you think of volatility as a fee, the trade-off is clearer and may be easier to stomach.

Save, invest and survive