Non-Fiction Book Review: The Psychology of Money By Morgan Housel
The Psychology of Money by Morgan Housel talks about the timeless lessons on wealth, greed, and happiness doing well with money isn’t necessarily about what you know.
It’s about how you behave. And behavior is hard to teach, even to really smart people. How to manage money, invest it, and make business decisions are typically considered to involve a lot of mathematical calculations, where data and formulae tell us exactly what to do. But in the real world, people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your unique view of the world, ego, pride, marketing, and odd incentives are scrambled together. In the psychology of money, the author shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important matters.
A Sneak Peek Into “The Psychology of Money”
I like to ask people, “What do you want to know about investing that we can’t know?”
It’s not a practical question. So few people ask it. But it forces anyone you ask to think about what they intuitively think is true but don’t spend much time trying to answer because it’s futile.
Years ago I asked economist Robert Shiller the question. He answered, “The exact role of luck in successful outcomes.”
I love that, because no one thinks luck doesn’t play role in financial success. But since it’s hard to quantify luck, and rude to suggest people’s success is owed to luck, the default stance is often to implicitly ignore luck as a factor. If I say, “There are a billion investors in the world. By sheer chance, would you expect 100 of them to become billionaires predominately off luck?” You would reply, “Of course.” But then if I ask you to name those investors — to their face — you will back down. That’s the problem.
“In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time.
But that’s not what people do.”
The same goes for failure. Did failed businesses not try hard enough? Were bad investments not thought through well enough? Are wayward careers the product of laziness?
In some parts, yes. Of course. But how much? It’s so hard to know. And when it’s hard to know we default to the extremes of assuming failures are predominantly caused by mistakes. Which itself is a mistake.
People’s lives are a reflection of the experiences they’ve had and the people they’ve met, a lot of which are driven by luck, accident, and chance. The line between bold and reckless is thinner than people think, and you cannot believe in risk without believing in luck, because they are two sides of the same coin. They are both the simple idea that sometimes things happen that influence outcomes more than effort alone can achieve.
When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.
The paradox of wealth is that people tend to want it to signal to others that they should be liked and admired. But in reality those other people bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth solely as a benchmark for their own desire to be liked and admired.
This stuff isn’t subtle. It is prevalent at every income and wealth level. There is a growing business of people renting private jets on the tarmac for 10 minutes to take a selfie inside the jet for Instagram. The people taking these selfies think they’re going to be loved without realizing that they probably don’t care about the person who actually owns the jet beyond the fact that they provided a jet to be photographed in.
The point isn’t to abandon the pursuit of wealth, of course. Or even fancy cars — I like both. It’s recognizing that people generally aspire to be respect- ed by others, and humility, graciousness, intelligence, and empathy tend to generate more respect than fast cars.
I used to park cars at a hotel. This was in the mid-2000s in Los Angeles, when real estate money flowed. I assumed that a customer driving a Ferrari was rich. Many were. But as I got to know some of these people, I realized they weren’t that successful. At least not nearly what I assumed. Many were mediocre successes who spent most of their money on a car. If you see someone driving a $200,000 car, the only data point you have about their wealth is that they have $200,000 less than they did before they bought the car. Or they’re leasing the car, which truly offers no indication of wealth.
We tend to judge wealth by what we see. We can’t see people’s bank ac- counts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Vacations. Instagram photos. But this is America, and one of our cherished industries is helping people fake it until they make it.
Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see.
But that’s not how we think about wealth, because you can’t contextualize what you can’t see.
Singer Rihanna nearly went broke after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”
You can laugh. But the truth is, yes, people need to be told that. When most people say they want to be a millionaire, what they really mean is “I want to spend a million dollars,” which is literally the opposite of being a millionaire. This is especially true for young people.
A key use of wealth is using it to control your time and providing you with options. Financial assets on a balance sheet offer that. But they come at the direct expense of showing people how much wealth you have with material stuff.
3 Words to Describe This Book
EYE-OPENING, BITE-SIZED, FUN
You know what’s fun about browsing books at the book store instead of buying them online? You end up with books like this. It is not until recently that I started to read more books in paperback versions instead of ebooks like I have been doing for the past decade. From when I was a kid, I have always loved books but for whatever reason, my parents hate it when I read. Even until today I cannot figure out the reason why that is. Like, mom dad, aren’t you supposed to be proud that all your daughter wanted to do was read and not snort white powder up her nose?
So I have always had to hide it when I read. But hey, tenacity and stubbornness got your girl to where she is today, so I can’t really complain. Childhood traumas aside, since 2020 I have decided to start supporting my local bookstores instead of continuing to feed the hungry cookie-monster that is Amazon. After doing this for almost 6 months, I found that not only am I reading more because of it but the books I read are also more diverse compared to before.
To be quite honest with you, had it not been for my local bookstore, I would not have picked The Psychology of Money up. Swear to god. This book wouldn’t even be on my radar. And yet now, your girl is one book more educated than she was before. So thank you, local bookstore for being patient with me and never kicks me out even as I disturb to peace by squealing excitedly about books.
TIME > MONEY
From The Psychology of Money, I learned a lot but one of the most important things that I take away from this book is the importance of financial independence. Different people look at money differently. There is no one size fits all when it comes to financing as different people who come from various backgrounds will look and perceive wealth and money unique to themselves and their experiences. Despite that, I think it can be agreed upon that for a lot of people, one of our main goals is to be financially independent.
To be financially independent is to have the ability to just up and leave if you hate the job that you’re currently doing. Being financially independent is to be able to go to bed without worry even if tomorrow the whole economy crashes and we go into another recession.
“At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history.
Heller responds, “Yes, but I have something he will never have … enough.”
It is not until I finished this book that I realized that all this time, what I wanted wasn’t to be rich but to be independent. I don’t need the newest iPhones or fast cars or having 10 mansions. The Psychology of Money made me realize that all this time what I’m chasing or running towards isn’t living in luxury or being surrounded by branded items, but security and freedom. Freedom to just up and leave if I feel like it without having to worry about my finances, and the feeling of security that even if we plunge into economic recession tomorrow I wouldn’t have to worry about putting food on the table and keeping a roof on my head. That’s what I have been running towards all this time and didn’t realize until now.
“Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.”
But then again, the same could be said for most people. At the end of the day, people want stability and the liberty to do anything they way, any time, with whomever they choose.
INVESTING AND STOCKS
I suppose this part is more personal, but being the curious chipmunk that I am, I have always been curious about investing and how it works. However, whenever I brought the idea up, it would be shut down by the people around me. They would feed me horror stories upon horror stories about how so and so failed and lost everything, how investing is like gambling and that gambling is bad. You know, all that fun stuff.
So I pushed that curiosity aside and continued with my life until I stumbled upon this book. And just like that, my curiosity about the finance world flare up again like it was yesterday. I suppose what I was trying to say is, at the end of the day, you have to make decisions for yourself. There would be people around you who would be pessimistic and tell you all sorts of ways on how things will go wrong––some might mean well, but then again, some just loathe to see you try something new.
I have been trying to live by the motto of, “If you don’t try, you’ll never know” for the longest time. Sure, the mountain might look too daunting and tall to climb, just as starting something new might be scary. But we only get to live life once and if the risk of doing it is not too extreme, what is the fault in trying? By trying, one learns. So what if we fall and fail? Failure is life’s greatest teacher, after all.
I DON’T KNOW WHAT I DON’T KNOW
This is something that I have been struggling with for the past few years: being open-minded. In today’s culture, I do think we use the world open-minded very loosely. A lot of people would casually mention that they’re “open-minded”, however, once you say something that’s just a little bit above their comfort zone they retreat.
For me, it’s the problem with sometimes being unable to wrap my head around why certain people think a certain way. For example, I would say that reading is good for the brain which most of us know is proven to be true. Therefore, when I meet people who are just really averse to reading without even giving it a fair shot in the first place, I not only get annoyed but also frustrated as to why they could be thinking the way they do.
However, a passage from The Psychology of Money resonated deeply within me and helped me understand why others behave the way they do and navigate my emotions a little better.
“Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.”
IT’S NOT ALL HARDWORK
For the people who are successful in life, we see a lot of them credit their success to hard work yet not many give enough credit to hard work’s best friend, luck. They just don’t mention it because hard work is easier to measure. For the outsiders looking in, successful people saying that their hard work gets them where they are today makes it feel like we too can achieve the level of affluence and wealth that they have, given that we put in the hard work.
But see, life doesn’t work like that. It is never that kind to everyone or else we would all be rich and happy and beautiful.
“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.”
Not just the rich and the wealthy, even for me––a lazy chipmunk who rolls around the bed all day––to be able to get to where I am today, to be born in this generation instead of the 1800s, luck plays a big role in it. What I’m trying to say is, crediting all our success or lack thereof to hard work might be a tad bit misleading because luck plays a role too.
And this goes both ways. When things go right, it is not all hard work and then things go bad, remember, luck plays a part––sometimes big, at times small. Not to mention, nothing––good or bad––in life, ever stay that way for too long.
In 2020 I have been reading a duck load of non-fiction novels, and if I were, to be honest with you, while all of them have been educational many of them weren’t exactly a breeze to go through. So let your girl celebrate this moment of bliss with The Psychology of Money because this book might be the first non-fiction novel that doesn’t feel like a mountainous chore to get through.
Your girl is no finance expert––heck, I’m not even a finance amateur––and yet this book makes it so easy for even finance noob like me to understand. While The Psychology of Money has been marketed as a book about finance, I have found that many of the things mentioned in the book could be applied to real-life as well, not just in finance. There are many things from this book that I would like to not only implement in my way of thinking about money and investing but also in my personal life as well.
I went into this book with little to no expectations whatsoever, and it knocked it out of the park for me. The Psychology of Money is definitely a book I would recommend, especially if you’re young and are thinking about starting to invest. Even if you didn’t manage to learn anything of value about finance from this book, I firmly believe there are many life lessons that we can take away from The Psychology of Money.
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