📚 Psychology of Money

Posted Apr 23, 2022 Updated Mar 23, 2024

By Adam 22 min read

If you want to become wealthy, here is your guide. Spoiler alert, spend less than you earn and need. There is never any certainty, you always have to take calculated risks. Learn what makes sense and what doesn’t.

About the book


Author:	Morgan Housel
Year of release:	2020
Genre:	Nonfiction, Psychology, Business, Economics, Finance, PersonalFinance, Self-Help
Pages:	252
Average WPM:	300
Date Started/Finished:	20-Apr-2022 to 23-Apr-2020
Time took:	2.8 Hours

What I Liked About It

It’s a better version of Rich dad, Poor dad just because it is straight to the point and doesn’t contain fluff

How I Discovered It

Found it online through recommendations
YouTube
- Ali Abdaal’s Book club video

Who Should Read It?

Anyone who wants to get into financial literacy and finance in general

Actionable takeaway

Do what I need to do then leave the rest because there is always an aspect of luck when it comes to (financial) success
Look at history, but you’ll not properly learn from it until you’ve lived through it
Money equals flexibility in life, the power to decide what you want to do with your time on your own terms. Becoming financially independent therefore pays an infinite dividend.
Keep throwing everything on the wall, a few things will stick. It’s the same in finances as it’s in life. Diversify your assets.

The Book in 3 Sentences

Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. The value of wealth is relative to what you need. Desire less, spend less, care less about what others think of you.
Everything about money is just playing the odds. There is no certainty, ever. You can only do the best according to the knowledge you currently have and acknowledge that you only know a very small percentage of what you would need to know in order to make the best possible decisions.
Expensive things like fancy cars and houses never make sense. Not even for showing off, because people won’t admire you, they’ll admire the stuff.

Top Quotes

A genius is the man who can do the average thing when everyone else around him is losing his mind.” - Napoleon

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

“Some lessons have to be experienced before they can be understood.” - Michael Batnick. We are all victims, in different ways, to that truth

The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money.

“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” - Bill Gates

Warren Buffett put it: To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish. It is just plain foolish.

The only way to know how much food you can eat is to eat until you’re sick.

Lessons from one field can often teach us something important about unrelated fields

There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait

There are a million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia. Getting money is one thing. Keeping it is another.

Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast.

A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.

“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune.

You don’t need a specific reason to save

Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.

Richard Feynman, the great physicist, once said, “Imagine how much harder physics would be if electrons had feelings.” Well, investors have feelings. Quite a few of them. That’s why it’s hard to predict what they’ll do next based solely on what they did in the past.

0.00000000004% of people were responsible for perhaps the majority of the world’s direction over the last century.

“—When forced to choose, I will not trade even a night’s sleep for the chance of extra profits” - Warren Buffett to Berkshire Hathaway shareholders in 2008

Spreadsheets are good at telling you when the numbers do or don’t add up. They’re not good at modelling how you’ll feel when you tuck your kids in at night wondering if the investment decisions you’ve made were a mistake that will hurt their future.

An important cousin of room for error is what I call optimism bias in risk-taking, or “Russian roulette should statistically work” syndrome: An attachment to favourable odds when the downside is unacceptable in any circumstances.

Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers and relationships. Endurance is key.

Pessimism holds a special place in our hearts. Pessimism isn’t just more common than optimism. It also sounds smarter.

Summary + Notes

The Psychology of Money

A genius is the man who can do the average thing when everyone else around him is losing his mind.” - Napoleon

“The world is full of obvious things which nobody by any chance ever observes.” - Sherlock Holmes

Introduction: The Greatest Show On Earth

Financial outcomes are driven by:

Luck
Independent of intelligence
Effort

2 topics impact everyone, whether you are interested in them or not:

Health
Money

Finance is guided by people’s behaviors. And how I behave might make sense to me but look crazy to you.

To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study

History of greed
Insecurity
Optimism

Chapter 1. No One’s Crazy

Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behavior.

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

“some lessons have to be experienced before they can be understood.” - Michael Batnick We are all victims, in different ways, to that truth

To rephrase an old saying: “everyone talks about retirement, but apparently very few do anything about it.”

Chapter 2. Luck & Risk

Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.
when judging success—both your own and others’: “Nothing is as good or as bad as it seems.”

Bill Gates went to one of the only high schools in the world to have a computer

Gates is not shy about what this meant. “If there had been no Lakeside, there would have been no Microsoft,” he told the school’s graduating class in 2005.
If you give luck and risk their proper respect, you realize that when judging people’s financial success—both your own and others’—it’s never as good or as bad as it seems.
Everything worth pursuing has less than 100% odds of succeeding, and risk is just what happens when you end up on the unfortunate side of that equation.
The difficulty in identifying; what is luck? what is skill? what is risk? is one of the biggest problems we face when trying to learn about the best way to manage money.

Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” - Bill Gates

Failure can be a lousy teacher because it seduces smart people into thinking their decisions were terrible

Chapter 3. Never Enough

Warren Buffett put it: To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish. It is just plain foolish.

There is no reason to risk what you have and need for what you don’t have and don’t need.

A friend of mine makes an annual pilgrimage to Las Vegas. One year he asked a dealer: What games do you play, and what casinos do you play in? The dealer, stone-cold serious, replied: "The only way to win in a Las Vegas casino is to exit as soon as you enter."

The only way to know how much food you can eat is to eat until you’re sick.

There are many things never worth risking, no matter the potential gain.

Chapter 4. Confounding Compounding

Lessons from one field can often teach us something important about unrelated fields.
The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results.
- The quote is likely emphasizing the idea that even small changes can have significant effects, and that “tremendous results” can be achieved without the need for “tremendous force.”
There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait.

Chapter 5. Getting Wealthy vs. Staying Wealthy

There are a million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.
Getting money and keeping money are 2 different skills.
- Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risks. It requires humility, and fear that what you’ve made can be taken away from you just as fast.
Charlie, Warren, and Rick were equally skilled at getting wealthy. But Warren and Charlie had the added skill of staying wealthy. Which, over time, is the skill that matters most
- Check out Case Study: The Fall of Rick Guerin for context
Nassim Taleb put it this way: “Having an 'edge' and surviving are 2 different things: the first requires the second. You need to avoid ruin. At all costs.”
- Nassim Nicholas Taleb is a Lebanese-American essayist, scholar, statistician, and former trader and risk analyst, who is known for his work on the problems of randomness, probability, and uncertainty.
Applying the survival mindset to the real world comes down to appreciating three things.
1. 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.
2. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
  - A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality. A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes room for error. The more you need specific elements of a plan to be true, the more fragile your financial life becomes.
  - Room for error—often called the margin of safety—is one of the most underappreciated forces in finance.
    - The margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival.
    - Its magic is that the higher your margin of safety, the smaller your edge needs to be to have a favorable outcome.
3. A barbelled personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.
  - I sometimes think that no price is too high for a speculator to pay to learn that which will keep him from getting the swelled head.

Chapter 6. Tails, You Win

The great art dealers operated like index funds. They bought everything they could. And they bought it in portfolios, not individual pieces they happened to like. Then they sat and waited for a few winners to emerge.
In 2018, Amazon drove 6% of the S&P 500’s returns. And Amazon’s growth is almost entirely due to Prime and Amazon Web Services, which itself are tail events in a company that has experimented with hundreds of products, from the Fire Phone to travel agencies.
Who’s working at these companies? Google’s hiring acceptance rate is 0.2%. Facebook’s is 0.1%. Apple’s is about 2%.
- So the people working on these tail projects that drive tail returns have tail careers.

The idea that a few things account for most results is not just true for companies in your investment portfolio. It’s also an important part of your own behavior as an investor.

Napoleon’s definition of a military genius was, "The man who can do the average thing when all those around him are going crazy." It’s the same in investing.
- Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.
  - A good definition of an investing genius is a man or woman who can do the average thing when all those around them are going crazy. Tails drive everything.
CEO Jeff Bezos said shortly after the disastrous launch of the company’s Fire Phone: If you think that’s a big failure, we’re working on much bigger failures right now. I am not kidding. Some of them are going to make the Fire Phone look like a tiny little blip.

George Soros once said, “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune.

The fact that you are reading this book is the result of the longest tail you can imagine.

Chapter 7. Freedom

Doing something you love on a schedule you can’t control can feel the same as doing something you hate. There is a name for this feeling. Psychologists call it reactance.
Jonah Berger, a marketing professor at the University of Pennsylvania, summed it up well:

“People like to feel like they’re in control—in the drivers’ seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.”

When asked about his silence during meetings, Rockefeller often recited a poem:

  A wise old owl lived in an oak,
  The more he saw the less he spoke,
  The less he spoke, the more he heard,
  Why aren’t we all like that wise old bird?

Chapter 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.

If respect and admiration are your goals, be careful how you seek them. Humility, kindness, and empathy will bring you more respect than horsepower ever will.

Chapter 9. Wealth is What You Don’t See

Modern capitalism makes helping people fake it until they make it a cherished industry.
Investor Bill Mann once wrote:

“There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have and not spend money you don’t have. It’s really that simple.”
Rich is a current income. But wealth is hidden. It’s income not spent.
Exercise is like being rich. You think, “I did the work and I now deserve to treat myself to a big meal.” Wealth is turning down that treat meal and actually burning net calories. It’s hard and requires self-control. But it creates a gap between what you could do and what you choose to do that accrues to you over time.
The problem for many of us is that it is easy to find rich role models. It’s harder to find wealthy ones because by definition their success is more hidden.

Chapter 10. Save Money

The world grew its “energy wealth” not by increasing the energy it had, but by decreasing the energy it needed.

Wealth is just the accumulated leftovers after you spend what you take in.

Learning to be happy with less money creates a gap between what you have and what you want

Past a certain level of income, what you need is just what sits below your ego.

One of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.

You don’t need a specific reason to save

In a world that’s as connected as ours, Intelligence is not a reliable advantage but flexibility is.

Chapter 11. Reasonable > Rational

You’re not a spreadsheet. You’re a person. A screwed-up, emotional person.
Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.
Anything that keeps you in the game has a quantifiable advantage.

Chapter 12. Surprise!

A trap many investors fall into is what I call the “historians as prophets” fallacy:
- An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.
Investing is not a hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their well-being, which can make even smart people nervous, greedy and paranoid.
Richard Feynman, the great physicist, once said, “Imagine how much harder physics would be if electrons had feelings.” Well, investors have feelings. Quite a few of them. That’s why it’s hard to predict what they’ll do next based solely on what they did in the past.
The cornerstone of economics is that things change over time because the invisible hand hates anything staying too good or too bad indefinitely