Book review and a short summary of The Psychology of Money: Timeless lessons on wealth, greed, and happiness by Morgan Housel
Introduction
The Psychology of Money by Morgan Housel is a book about the psychology behind our financial decisions. The book is a guide on why we make those decisions and how to improve on them. Some of the insights/advice are discussed below.
Making money and staying wealthy are two different skills
The book shares that making money involves a mix of luck along with factors such as education or intelligence. Staying wealthy involves understanding certain realities and aligning our mindset and behavior in certain ways.
The book opens with the story of a man who had it all and lost it all and another man who didn’t have much but ended up with a lot. The different trajectories of wealth these individuals had, has a lot to do with their behavior. Certain character traits and behavioral patterns help us stay wealthy. These individuals differed in that aspect and had wildly different outcomes later in life. This story discussed in the book is an example of those differences at work. The book also expands on this topic in much more detail.
The role of luck and risk in our lives
Luck and risk could have major impacts on our lives. We cannot plan for them because we don’t know what is going to happen in the future. What we can do is plan for the ever present possibility of such events. Keeping this in mind helps us plan better for our future.
Building wealth is a long game. Luck has a role and so does time. Unfavorable surprises along the way could set us back by years. Being prepared in general for these unfavorable surprises helps a lot in surviving such downturns. This could be like having a better outlook towards saving money or having a plan B when plan A fails.
Regarding saving money the book says to save for savings sake, not just to buy a car or a home. The savings help you during the unexpected twists and turns that happen in our lives, acting as a buffer against it, say a layoff from a job. It gives us time to think clearly. Imagine having to accept a job that is sub optimal because you are desperate versus having the bandwidth to wait a bit longer for a better opportunity.
The book shares an example of luck and risk from the life of Bill Gates and one of his classmates and friend, Kent Evans. They both went to one of the only high schools in the world that had a computer. The book calculates the chance of this to be one in a million, while he was studying there. Kent Evans was brilliant too like Bill Gates. They were both interested and good at computers, and ambitious. Unfortunately Kent passed away in a mountaineering accident, a one in a million chance event for high schoolers. This example illustrates two one in a million chance events of luck and risk working in highly consequential and completely different ways.
Psychology of financial decision making
Our life experiences, beliefs, emotions and biases play a role in how we make decisions. This includes financial decisions too. The book has details on these aspects for example the decisions made by people who went through a recession are generally more on the cautionary side as opposed to somebody who went through the opposite.
Clinging onto losses in the hope that it would turn around is an other point shared in the book. That hope may not survive our emotional downturns or financial realities. We may end with a bigger loss from which it is difficult to recover. The book shares a better mindset to have when going through a loss. It is realizing that we could lose half the time and still win the game, given that gains are bigger than losses. Having this awareness may help you in cutting losses early and potentially avoid ruin.
I also liked the points about not moving the financial goalpost in terms of not wanting more and more and not spending more and more. Moving the goalpost farther and farther away could end up badly for us, like never being content or taking unnecessary risks. The book shares some reasons as to why it could be happening. It could be because of not having a sense of what is enough for us or the pressures we put on ourselves by comparing ourselves to others.
The book has more of such insights and advice shared in it. The examples explaining it are a great addition too. I recommend you check out the book to learn more.
Conclusion
Understanding the psychological aspects of how we make financial decisions help us in being aware of it, recognize it and gives us a chance to work alongside it. This book helps you with that and I highly recommend it to you.
Book discussed
- The Psychology of Money: Timeless lessons on wealth, greed, and happiness by Morgan Housel