The Psychology of Money (Book Review + Notes)

Notes & thoughts on Morgan Housel's book: The Psychology of Money
October 16, 2020

The biggest problem with personal finance books is that they assume readers are rational.

Putting 90% of your net worth into VSTAX when you’re 25 years old may be the rational thing to do. But if you can’t handle a 5-10% drop emotionally (meaning you’ll pull it out at the first dip, realizing your losses), then that advice is worthless.

Morgan Housel’s book The Psychology of Money is refreshing. It doesn’t give a tactical program or plan. It doesn’t tell you to do X or Y. Instead, it makes you think about your finances (and money in general).

I strongly recommend this book. 5 stars all around. 

  • Concise/no-fluff: 5/5
  • Readability: 5/5
  • Originality: 5/5
  • Overall: 5/5

Book Notes + My Commentary

“financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”

There are fiscally-responsible people out there who’ve never read a personal finance book, and there are fiscally-irresponsible people who’ve read dozens.

It’s not what you know, it’s what you do

Trying to save/invest 30% of your income is a behavior problem. It won’t be solved by more reading. 

“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.”
“A view about money that one group of people thinks is outrageous can make perfect sense to another.”

I like having a good stack of cash in the bank. 

Not investments. Not a house. Just liquid cash in the bank. It helps me sleep at night, and gives me optionality. 

There are some people who’d look at my allocation and think that I’m far too risk-averse and I’m losing money each year to inflation. Others will look at it and say that I’m taking too much risk because I have a certain % of my networth in the stock market & crypto. 

Everyone has different views. Everyone has different experiences. 

“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.”
“Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting. Places where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together into a narrative that works for you.”
“Since it’s hard to quantify luck and rude to suggest people’s success is owed to it, the default stance is often to implicitly ignore luck as a factor of success.”
“Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.”
“40% of companies successful enough to become publicly traded lost effectively all of their value over time. The Forbes 400 list of richest Americans has, on average, roughly 20% turnover per decade for causes that don’t have to do with death or transferring money to another family member.”
“Capitalism is hard. But part of the reason this happens is because getting money and keeping money are two different skills.”

I’ve noticed this in my space (online business).

People have their first good month and go crazy. They start renting a penthouse. They lease a nice car.

They assume that things are going to carry on, and that they’re only going to grow.

That’s not how the world works. 

“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.”
“If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.”
“The ability to do what you want, when you want, for as long as you want, has an infinite ROI.”

Choosing higher financial return at the cost of autonomy is rarely worth it. 

“The fuel of the End of History Illusion is that people adapt to most circumstances, so the benefits of an extreme plan—the simplicity of having hardly anything, or the thrill of having almost everything—wear off.”
“Regrets are especially painful when you abandon a previous plan and feel like you have to run in the other direction twice as fast to make up for lost time.”
“Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum.”
“There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.”
“There are many things in life that we think are true because we desperately want them to be true. I call these things “appealing fictions.” They have a big impact on how we think about money—particularly investments and the economy. An appealing fiction happens when you are smart, you want to find solutions, but face a combination of limited control and high stakes. They are extremely powerful. They can make you believe just about anything.”
“We need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.”

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