The Psychology of Money: Timeless Lessons on Wealth, Greed, and

Happiness by Morgan Housel

Morgan Housel shows you how to develop a better connection with money and make better
financial decisions in The Psychology of Money. Rather than believing that humans are ROI-
optimizing robots, he demonstrates how psychology can both help and hinder you.

The challenge for us is that no amount of studying or open-mindedness can genuinely recreate
the power of fear and uncertainty.

Teachings in the book warn us about particular actions, while others urge us to adopt healthy
habits. The beauty of these teachings is that they are open to everyone; they are not limited to
high-income earners or those with advanced degrees. This book will not provide you with in-
depth understanding of investing instruments, asset allocation, or tax-advantaged techniques;
nonetheless, it will enhance your money connection and attitude toward personal finance.
Housel promises us that achieving financial success is not difficult; all it takes is discipline,
patience, and a few positive behaviours.

The focus of this book is that being successful with money has less to do with intelligence and
more to do with behaviour.

A brilliant person who loses control of his or her emotions might be a financial disaster.
Likewise, the inverse is true. Ordinary people with no financial education can become wealthy if
they possess a few behavioural talents that have nothing to do with IQ tests.

Here are two opposing examples:

Ronald James Read was an American philanthropist, a gas station attendant, and a janitor. Read
had acquired a $8 million net worth at the time of his death by saving throughout his life and
living frugally. He left the majority of his wealth to a local hospital and library.

Richard Fuscone, a Merrill Lynch executive with a Harvard education. Borrowed a lot of money
and spent it all, only to be slammed by the financial crisis in 2008 and declare bankruptcy.

Ronald Read was patient, but Richard Fuscone was avaricious. That was all it needed to
overcome the huge educational and experience divide between them.

There are two possible explanations for the occurrence of stories like Read and Fuscone:

Financial achievements are determined by chance, rather than intellect or effort. Financial
success is not a hard science, (to some extent accurate) It's a soft talent in which hat you know
is less essential than how you act. (Housel feels this is the more common interpretation of the
two.)

It is inadequate to know how to accomplish something. In many cases, you will also have to deal
with your own internal emotional and mental turmoil, which will impact or change your
intended reaction.

We think about and are taught about money in ways that are far too physics-like (with rules and
regulations) and much too psychology-like (with emotions and subtlety).

You don't need to study interest rates to understand why people go into debt; you need to study
the history of greed, insecurity, and optimism.
Chapter 1: No One’s Crazy

Everyone features a unique idea of how the planet works. This worldview is influence by
a singular set of circumstances, values, and external influences.

Your personal experiences with money structure maybe 0.00000000001% of what’s

happened within the world, but maybe 80% of how you think that the planet works.

No amount of studying or open-mindedness can genuinely recreate the facility of fear

and uncertainty.

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

For example:

If you were born in 1950, the stock exchange was flat during your teens and 20s (adjusted for
inflation).

If you were born in 1970, the S&P 500 increased 1000% during your teens and 20s (adjusted for
inflation).

Which generation is more likely to possess a bullish view of the stock market?

Their view of cash was formed in several worlds. And when that’s the case, a view
about money that one group of individuals think is outrageous can make perfect sense
to a different .

Consider people presumably to get lottery tickets within the U.S.: low-income
households who spend, on the average $400/year. Number seems crazy to people in
higher income households. But some might justify the acquisition by saying they're
paying for hope and a dream. Without being in their shoes, it’s hard to completely
appreciate why they behave the way they are doing .

Modern financial planning is comparatively new. as an example , individual retirement

accounts are a recent phenomenon. 401k were created in 1978. Roth IRA was created in
1998. Index funds were developed within the 1970s.

As Housel says, many of the poor financial decisions stem from our collective
inexperience: there isn't decades of accumulated experience...we’re winging it.

Chapter 2: Luck & Risk

Outcomes are determined by quite effort. Luck and risk often figure prominently in individual
outcomes.

Story of Bill Gates: Gates attended one among the sole high schools within the world that had a
computer in 1968. Were it not for the efforts of an educator , Bill Dougall, to acquire a $3000
teletype computer, it's unlikely that Gates would enjoyed an equivalent career success.

Gates himself admits as much: If there had been no Lakeside [High School], there would are no
Microsoft.
At Lakeside there have been three standout computer students (all friends): Gates , Paul Allen,
and Kent Evans. Kent Evans was destined for fulfillment but met an untimely death during a
mountaineering accident before graduation. this is often used as an example of bad luck.

Luck and risk are both the truth that each outcome in life is guided by forces aside from
individual effort...they both happen because the planet is just too complex to permit 100% of
your actions to dictate 100% of your outcomes.

The accidental impact of actions outside of your control are often more consequential than
those you consciously take.

Focus less on specific individuals and case studies and more on broad patterns.

Extreme outcomes are low probability outcomes. Applying the teachings of these who achieved
these outlier results isn’t always helpful since external forces of luck and risk may have played
immeasurable and non replicable roles.

Instead check out broad patterns that provide directional insights. as an example , happy people
tend to be those that control their time and energy.

Chapter 3: Never Enough

Story about writers Vonnegut and Heller (Catch-22) attending a celebration hosted by a
billionaire. Vonnegut remarks that the billionaire makes extra money during a single day than
Heller made up of his popular novel. Heller responds: Yes, but I even have something he will
never have...enough.

Examples of Rajat Gupta and Bernie Madoff: people that had everything but wanted more. They
brought ruin upon themselves because the were greedy and didn’t know when to prevent .

There is not any reason to risk what you've got and wish for what you don’t have and don’t
need.

The hardest financial skill is getting the goalpost to prevent moving.

Comparing ourselves to others is usually the culprit. Capitalism is sweet at generating both
wealth and envy. But social comparison may be a process without end: there’s always someone
above on the ladder.

Enough doesn’t mean you've got to travel without. Enough means you recognize when to avoid
doing something you'll regret.

Many things aren't well worth the risk, no matter the gains. a brief list: reputation, freedom,
family and friends, love, happiness.

The only thanks to win is to refrain from playing the sport .

Chapter 4: Confounding Compounding

The simplest fact about Warren Buffett’s fortune: He wasn’t just an honest investor, he
was an honest investor for 75+ years.
• Effectively all of Warren Buffett’s financial success are often tied to the financial base
he inbuilt his pubescent years and therefore the longevity he maintained in his geriatric
years. His skill is investing, but his secret is time.
• Good investing isn’t necessarily about earning the very best returns...It’s about earning
pretty good returns that you simply can persist with and which may be repeated for the
longest period of your time . That’s when compounding runs wild.

Chapter 5: Getting Wealthy vs. Staying Wealthy

There are some ways to urge wealthy. there's a method to remain wealthy: through a

mixture of frugality and paranoia.
• Getting money and keeping money entirely various things and need entirely different
mindsets and methods .
o Getting money requires taking risks, being optimistic and putting yourself out there.
o Keeping money requires the other ...it requires humility, and fear that what you’ve
made are often removed from you only as fast.
• Michael Moritz (venture capitalist): We assume that tomorrow won’t be like yesterday.
We can’t afford to rest on our laurels. We can’t be complacent. We can’t assume that
yesterday’s success translates into tomorrow’s luck .
• Nassim Taleb: Having a foothold and surviving are two different things: the
primary requires the second. you would like to avoid ruin. in the least costs.
• Having a survival mindset requires three things:
o Aim to be financially unbreakable: be ready to stick out swings within the market and
stay within the game long enough for compounding to figure its magic.
o The most vital thing to plan for: the plan won’t go consistent with plan. an honest plan
leaves room for error. The more you would like specific elements of an idea to be true, the
more fragile your budget becomes.
o Be optimistic about the longer term but paranoid about the obstacles to your success.

Chapter 6: Tails, You Win

Story of the art collector Heinz Berggruen. He amassed a tremendous collection of Picassos,

Braques, Klees and Matisses.
o People were amazed by his art investing acumen.
o The reality was that he bought massive quantities of art. Only a subset of his collection
was valuable.
o Berggruen might be wrong most of the time and still find yourself stupendously right.
• Anything that's huge, profitable, famous, or influential is that the results of a tail-event
—an outlying one-in-thousands or millions event.
• This is that the risk capital model: If a fund makes 100 investments, they expect 80% to
fail, a couple to try to to reasonably well and 1-2 to drive the funds returns.
• Consider the distribution of winners and losers within the stock market: most public
companies fail, a couple of do ok and a couple of generate extraordinary returns.
• When you accept that tails drive everything in business, investing, and finance you
realize that it’s normal for many things to travel wrong, break, fail, and fall.
• Warren Buffett stated at the 2013 Berkshire Hathaway shareholder meeting that he’s
owned shares in 400-500 different companies over his life. His significant gains came from
just a handful: 10.
• We see outsized results from a mere fraction of the events or actions in our lives.

Chapter 7: Freedom

The ability to try to to what you would like , once you want, with who you would like , for
as long as you would like , is priceless.
• Money’s greatest intrinsic value...is its ability to offer you control over some time .

Chapter 8: Man in the Car Paradox

You seldom say, 'Wow, the man driving that automobile is cool,' when you see
someone driving a good car. Instead, you say to yourself, Wow, people would think
I'm awesome if I owned that automobile. This is how people think, whether they are
conscious of it or not.

In other words, when we indicate that we are affluent and that others should like and
adore us, what actually happens is that people disregard the person who owns the
object of envy and focus solely on the property.

Chapter 9: Wealth Is What You Don’t See

It's possible that someone driving a $100,000 automobile is affluent. However, the only
information you have about their wealth is that they are $100,000 less than they were
before they purchased the automobile.

Wealth is financial assets that haven't yet been turned into the things you see, says
one expert.

When individuals say they want to be millionaires, what they really mean is that they
want to spend a million dollars, according to Housel.

It's exactly the reverse of becoming a billionaire to spend a million dollars.

What is the difference between affluent and wealthy people?

People who own large homes and drive expensive automobiles are wealthy. People who earn a
lot of money are wealthy. They make it clear that they are wealthy.

Money is kept secret. Wealth is money that is kept rather than wasted. Optionality, flexibility,
and expansion are all aspects of wealth. The ability to buy things if you needed to is referred to
as wealth.

Chapter 10: Save Money

 There are three categories of people (after a particular salary level): o Those that
save.

Those who doubt their ability to save.

Those who believe they do not need to save.

Why Your savings rate matters more than your earnings or investment results.

An analogy would be the oil crises of the 1970s.

Issue: Oil supplies could not keep up with demand and economic expansion.

Solution: While oil supply grew by 65 percent, fuel efficiency and

conservation quadrupled the amount of energy that could be used.

People had no power over the supply side, but they did have total control over the demand side.

You can grow wealth without a big salary, but you have no chance of building
money without a high savings rate.

Learning to be content with less money creates a gap between what you have
and what you desire, similar to the gap that grows as your income grows, but it's
easier and more in your control.

Once you've reached a certain level of money, all you need is what's beneath
your ego. Solution: Don't be concerned with what others think of you or feel
compelled to keep up with the Joneses.

An invisible return on riches is the flexibility and control over your time.

Having more time and alternatives is quickly becoming one of the most valued
currencies in the world.

Chapter 11: Reasonable > Rational

When making financial judgments, don't try to be coldly rational. Aim to be as

reasonable as possible. Reasonable is more practical, and you have a higher
chance of keeping to it over time, which is what counts most when it comes to
money management.

In the past, the chances of generating money have increased over time. Lesson:
stick to your guns and don't be swayed by short-term volatility. Positive returns
are 68 percent likely over one year, 88 percent likely over ten years, and 100
percent likely over twenty years, for example.

Chapter 12: Surprise!

Scott Sagan (political scientist): Things that haven't happened before happen all the time.
• History helps us calibrate our expectations, study where people tend to travel wrong and
offer a rough guide of what tends to figure . But it's not, in any way, a map of the longer
term .
• Remember: Past performance isn't a sign of future results, because the ubiquitous
financial disclaimer states.
• Focusing on past history and past patterns may cause two things:
1. Overlooking outlier events that move the needle.
 Example: 15 billion people were born within the 19th and 20th centuries. But consider
the handful that inordinately influenced historical events: Hitler, Stalin, Mao, Edison, Gates,
MLK, etc.
 Example: Consider the projects, events, and innovations of the last century:  the
good Depression, WW2, Vaccines, Antibiotics, the web , the autumn of the Soviet Union .
 Certain people and events have influence that's orders of magnitude quite others. Housel
calls these tail events.
 Tail events cause 2nd and 3rd order repercussions. It is straightforward to
underestimate how things compound...for example, 9/11 prompted the Federal Reserve
System to chop interest rates, which helped drive the housing bubble, which led to the
financial crisis, which led to a poor jobs market, which led tens of millions  to hunt a
university education, which led to $1.6 trillion in student loans with a ten .8% default rate.
It’s not intuitive to link 19 hijackers to the present weight of student loans...
 The majority of what’s happening at any given moment within the global economy are
often tied back to a couple of past events that were nearly impossible to predict.
 These surprise events are nearly impossible to predict because they're so improbable
and depend upon the luck and occurrence of the many similarly unlikely precursor events.
 This isn't a failure of study . It’s a failure of imagination.  it's difficult to imagine a
future that appears nothing like today or anything we've seen before.
 Daniel Kahneman (psychologist and economist): The correct lesson  to find out from
surprises: that the planet is surprising.
 Similarly, we should always be skeptical of these who profess to understand with great
certainty how the longer term will unfold.
2. Misreading this by looking to the past because the past DOESN’T accounts for the
structural changes that are relevant in today’s world.
 Example: Certain financial mechanisms are new. Advice that predates these realities is
obsolete. For instance: 401ks appeared in 1978. risk capital barely existed 25 years ago. The
S&P 500 didn't include financial stocks until 1976.
 Recent history is that the most relevant to the longer term since it accounts for a few of
the important or relevant innovations and conditions which will impact the longer term .
 The further back in history you look, the more general your takeaways should be.

Chapter 13: Room for Error

Blackjack and poker players are well aware that they are dealing with
probabilities rather than guarantees.

The greatest strategy is to prepare for things to go wrong.

The only efficient method to properly traverse a world ruled by odds, not
certainties, is to leave a margin of safety—also known as room for error or
redundancy.

When playing Russian roulette, the chances are in your favour. However, the
risk is not worth the possible reward. There is no way to compensate for the
danger with a margin of safety.

It's hard to plan for or predict what you can't see.

Avoid single points of failure to reduce the effect of failure.

A sole dependence on a paycheck to cover short-term spending demands, with

no savings to create a gap between what you think your costs are and what they
could be in the future, says one expert.

Rainy-day savings are an excellent idea: put money aside for situations you can't
foretell or expect.

Chapter 14: You’ll Change

We are terrible predictors of our future selves. Our present needs, wants, and
reams aren't an equivalent as our future needs, wants, and dreams.
• The End of History Illusion is what psychologists call the tendency for people to be
keenly conscious of what proportion they’ve changed within the past, but to
underestimate what proportion their personalities, desires, and goals are likely to
vary within the future.
• The result's that long-term plans and decision-making is extremely difficult to try to
to effectively.
• Accept the truth that individuals are susceptible to change. What matters to you
today, could also be viewed as inconsequential during a decade.
• Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a
devil during a world where people change over time. they create our future selves
prisoners to our past, different, selves. It’s the equivalent of a stranger making major life
decisions for you.

Chapter 15: Nothing’s Free

The key to tons of things with money is simply deciding what that price is

and being willing to pay it.
• Successful investing demands a price. But its currency isn't dollars and
cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are
easy to overlook until you’re handling them in real time.
• Few investors have the disposition to mention , ‘I’m actually fine if I lose
20% of my money...but if you view volatility as a fee, things look different.
• When you invest within the future , you would like to be willing to simply
accept the short-term price of market fluctuations.

Chapter 16: You & Me

One reason for market bubbles: Investors often innocently take cues from other investors
who are playing a special game than they're .
• Short term momentum attracts investors with short time horizons. Bubbles aren’t  such a
lot about valuations rising. That’s just a symbol of something else: time horizons shrinking
as more short-term traders enter the playing field. But note that the short-term investors
will only stick around goodbye because the momentum continues, but that this momentum
is transient.
• Bubbles do their damage when long-term investors playing one game start taking their
cues from those short-term traders playing another.
• It’s hard to understand that other investors have different goals than we do, because an
anchor of psychology isn't realizing that rational people can see the planet through a
special lens than your own.

Chapter 17: The Seduction of Pessimism

Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually
captivating, and it’s paid more attention than optimism, which is usually viewed as being
oblivious to risk.
• Tell someone that everything are going to be great and they’re likely to either shrug you
off or offer a skeptical eye. Tell someone they’re in peril and you've got their undivided
attention.
• Daniel Kahneman: This asymmetry between the facility of positive and negative
expectations or experiences has an evolutionary history. Organisms treat threats as more
urgent than opportunities have a far better chance to survive and reproduce.
• Pessimists often extrapolate present trends without accounting for a way markets adapt.

o Remember the story from chapter 10 about the 1970s oil crisis: pundits did not account
for innovation in fuel efficiency and cheaper, more efficient oil extraction.
o Similarly, within the 2000s, as oil prices increased, certain sort of oil extraction became
economically feasible like fracking.
• Necessity is that the mother of all invention and humanity is endlessly innovative.
People answer adversity and problems with new and novel solutions.
• Threats incentivize solutions in equal magnitude. That’s a standard plot of economic
history that's too easily forgotten by pessimists who forecast in straight lines.
• Progress is slow, but setbacks and disaster happens quickly and impactfully. There
are many overnight tragedies. There are rarely overnight miracles.
• Growth is driven by compounding, which always takes time. Destruction is driven by
single points of failure, which may happen in seconds, and loss of confidence, which
may happen in an instance.

Chapter 18: When You’ll Believe Anything

The more you would like something to be true, the more likely you're to believe a story that
overestimates the chances of it being true.
• Everyone has an incomplete view of the planet . But we form an entire narrative to
fill within the gaps.
• B.H. Liddell Hart (historian) in his book Why Don’t We Learn from History? :
History can't be interpreted without hte aid of imagination and intuition. The sheer
quantity of evidence is so overwhelming that selection is inevitable.
Where there's selection there's art. those that read history tend to seem for what proves
them right and confirms their personal opinions.
• Daniel Kahneman: Hindsight, the power to elucidate the past, gives us the illusion
that the planet is understandable. It gives us the illusion that the planet is sensible , even
when it doesn’t add up . That’s an enormous deal in producing mistakes in many fields.
• Rather than accept that we don’t know something we actively plan to develop personal
theories (stories) that makes illusory understanding that's psychologically comforting.
Illusion of control vs. the truth of uncertainty.
• Recognize that there's much you are doing not know and far that's outside of your
control.
• Philip Tetlock (psychologist): We got to believe we sleep in a predictable, controllable
world, so we address authoritative-sounding people that promise to satisfy that require .
• Kahneman identified relevant errors in cognition:
o When planning we specialise in what we would like to try to to and may do and neglect
the plans, actions, and decisions of others who might impact our personal outcomes.
o When studying the past and forecasting the longer term we overemphasize individual skill
and discount luck.
o We specialise in what we all know and ignore what we don’t know. This leads
to overconfidence.

Chapter 19: All Together Now

The following lessons are summarised in this chapter: humility, less ego, wealth vs. riches,
financial decisions that provide peace of mind, use the power of time and consistency, accept
failure and risk, strive for time freedom, frugality, make saving a core habit, be prepared to pay
the price required for successful outcomes, prepare a margin of safety, avoid extremes, define
the game you're playing.

Chapter 20: Confessions

This chapter outlines some of the author's financial habits and beliefs:

Housel's financial actions are driven by his independence.

Live within your financial means.

Enjoy free or low-cost hobbies such as exercise, reading, podcasts, and learning.

Does not have a mortgage on his home. Admits that this is a bad financial decision, but it is a
good financial decision (peace of mind).

Keeps a cash reserve of 20% of his assets (outside of the value of his primary home). He does
this to have a safety net in place and prevent having to liquidate his stock market investments in
the event of an emergency.

The first rule of compounding is to never stop it needlessly, says Charlie Munger.

Does not invest in individual stocks any more. Housel only invests in low-cost index funds on the
stock market.

Some people can surpass the market averages—simply it's very difficult, and much more
difficult than most people believe.

Every investor should choose a strategy that gives them the best chance of achieving their
objectives...for most investors, dollar-cost averaging into a low-cost index fund will provide them
the best long-term results.

Contribute to your children's 529 plans and max out your retirement accounts.

His financial condition is straightforward. A property, a bank account, and Vanguard index funds
make up the entirety of his net worth.
 One of my sincerely held investing views is that investment effort and
investment success have minimal link.

Housel's strategy has three crucial elements: a high savings rate, patience, and
long-term optimism.