The Psychology of Money by Morgan Housel

Timeless lessons on wealth, greed, and happiness.

I recently read the Psychology of Money by Morgan Housel and thought it was one of the best books I’ve read on personal finance. Interestingly, the book does not cover any specific investment strategies or techniques to beat the market — instead, it focuses on the mindsets, attitudes, and the underlying psychology of how to succeed in the game of money. I found the book to be both entertaining, and at the same time profoundly wise and insightful. I thought I’d share the key insights and takeaways in this blog post!

Here are the key ideas, chapter by chapter:

1. No One’s Crazy:

The basic idea of this chapter is that every person has a unique attitude towards money that is shaped by their childhood experiences, the family they were raised in, their cultural background, the era they were born into, etc. And while we are tempted to think of finances in terms of numbers, our relationship with money is largely emotional. Here are some of my favorite quotes from the chapter:

• “Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.”
• “People do some crazy things with money. But no one is crazy. Here’s the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.”

2. Luck & Risk:

Whether we like it or not, luck is a part and parcel of the outcomes we get in life. There is much we cannot control about what happens to us in life — your financial outcomes are no exception to this. Some of my favorite lines from this chapter include:

• “Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. Or, just be careful when assuming that 100% of outcomes can be attributed to effort and decisions.”
• “They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.”
• “The line between ‘inspiringly bold’ and ‘foolishly reckless’ can be a millimeter thick and only visible with hindsight. Risk and luck are doppelgangers.”

3. Never Enough:

• “The hardest financial skill is getting the goalpost to stop moving. But it’s one of the most important. If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort. It gets dangerous when the taste of having more — more money, more power, more prestige — increases ambition faster than satisfaction.”
• “Social comparison is the problem here … The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with — to accept that you might have enough, even if it’s less than those around you.”

4. Confounding Compounding:

• “If something compounds — if a little growth serves as the fuel for future growth — a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to.”
• “If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing.”
• “Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s 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.”

5. Getting Wealthy vs. Staying Wealthy:

• “Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.”
• “The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own. There are two reasons why a survival mentality is so key with money. One is the obvious: few gains are so great that they’re worth wiping yourself out over. The other is the counterintuitive math of compounding. Compounding only works if you can give an asset years and years to grow.”
• “More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.”

6. Tails, You Win:

• “That can be hard to deal with, even if you understand the math. It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.”
• “Anything that is huge, profitable, famous, or influential is the result of a tail event — an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.”

7. 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.“

• “The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today.’ People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness — a universal fuel of joy — it’s that people want to control their lives.”
• “More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.“
• “Money’s greatest intrinsic value — and this can’t be overstated — is its ability to give you control over your time. To obtain, bit by bit, a level of independence and autonomy that comes from unspent assets that give you greater control over what you can do and when you can do it.”
• “Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.”
• “Aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return.”
• “Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals. Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.”

8. Man in the Car Paradox

• “There is a paradox here: people tend to want wealth to signal to others that they should be liked and admired. But in reality, those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.”

9. Wealth is What You Don’t See

“Spending money to show people how much money you have is the fastest way to have less money.”

• “We tend to judge wealth by what we see, because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Instagram photos. Modern capitalism makes helping people fake it until they make it a cherished industry.”
• “The truth is that wealth is what you don’t see. Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see. That’s not how we think about wealth, because you can’t contextualize what you can’t see.”
• “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 to one day purchase more stuff than you could right now.”

10. Save Money

“Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.”

• “Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.”
• “Spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money. Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility. When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little.”
• “Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.”
• “Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate.”
• “If you have flexibility you can wait for good opportunities, both in your career and for your investments. You’ll have a better chance of being able to learn a new skill when it’s necessary. You’ll feel less urgency to chase competitors who can do things you can’t, and have more leeway to find your passion and your niche at your own pace. You can find a new routine, a slower pace, and think about life with a different set of assumptions.”
• “Having more control over your time and options is becoming one of the most valuable currencies in the world.”
• “Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see.”

11. Reasonable > Rational

• “A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your own personal doubts. Investing has a social component that’s often ignored when viewed through a strictly financial lens.”

12. Surprise!

“The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next.”

• “History is the study of change, ironically used as a map of the future.”
• “It is smart to have a deep appreciation for economic and investing history. History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future.“
• “History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.”
• “The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff. But specific trends, specific trades, specific sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Historians are not prophets.”

13. Room for Error

“Margin of safety — you can also call it room for error or redundancy — is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world.”

• “Worship room for error. A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance, and endurance is what makes compounding magic over time.”
• “The most important part of every plan is planning on your plan not going according to plan.”
• “There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone — not consistently, anyway. You have to give yourself room for error. You have to plan on your plan not going according to plan.“
• “If there’s one way to guard against their damage, it’s avoiding single points of failure. A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.”
• “The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”

14. You’ll Change

“Long-term planning is harder than it seems because people’s goals and desires change over time.”

• “An underpinning of psychology is that people are poor forecasters of their future selves. Imagining a goal is easy and fun. Imagining a goal in the context of the realistic life stresses that grow with competitive pursuits is something entirely different. This has a big impact on our ability to plan for future financial goals.”
• “We should also come to accept the reality of changing our minds.”

15. Nothing’s Free

“Everything has a price, but not all prices appear on labels.”

• “Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it. The problem is that the price of a lot of things is not obvious until you’ve experienced them firsthand, when the bill is overdue.”
• “Most things are harder in practice than they are in theory. Sometimes this is because we’re overconfident. More often it’s because we’re not good at identifying what the price of success is, which prevents us from being able to pay it.”
• “Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret — all of which are easy to overlook until you’re dealing with them in real time.”
• “Market returns are never free and never will be. They demand you pay a price, like any other product.”
• “The trick is convincing yourself that the market’s fee is worth it. That’s the only way to properly deal with volatility and uncertainty — not just putting up with it, but realizing that it’s an admission fee worth paying. There’s no guarantee that it will be.”
• “Define the cost of success and be ready to pay for it. Because nothing worthwhile is free.”

16. You & Me

“Beware taking financial cues from people playing a different game than you are.”

• “An idea exists in finance that seems innocent but has done incalculable damage. It’s the notion that assets have one rational price in a world where investors have different goals and time horizons.”
• “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.”
• “A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. The main thing I can recommend is going out of your way to identify what game you’re playing.”
• “Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you.“

17. 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.”
• “Money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.”
• “Pessimists often extrapolate present trends without accounting for how markets adapt.”
• “Progress happens too slowly to notice, but setbacks happen too quickly to ignore.”
• “It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together.”

18. When You’ll Believe Anything

“Stories are, by far, the most powerful force in the economy. They are the fuel that can let the tangible parts of the economy work, or the brake that holds our capabilities back.”

• “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.”
• “Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.”
• “Wanting to believe that we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control.“

And that’s a wrap! I really hope you enjoyed reading this blog post, and it inspired you to think differently about money. If you enjoyed reading this, please give me a few claps, and follow me on Medium! There are a lot more interesting ideas coming your way!