Book Summary of The Psychology of Money

The Psychology of Money by Morgan Housel (2020) examines personal finance through the lens of human behavior. It’s a fresh take on a well-trod subject; many personal finance books focus on exogenous considerations: e.g. how the stock market works, how to select stocks or build a portfolio, how to time the market, etc. Housel's focus is on the relationship between people and money—with particular emphasis on the human variable of the equation.“To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism.”.

Housel’s conviction is that behavior trumps other considerations in the pursuit of financial success. “Doing well with money has a little to do with how smart you are and a lot to do with how you behave.” Engage in the right behaviors and you are likely to succeed. Similarly, no amount of intelligence, savvy, or inside information will save you from the wrong set of behaviors.

Each of the first 18 chapters in the book explores an individual human behavior or attitude towards money (the final two chapters are a summary of the lessons and a commentary on Housel’s personal financial practices). Certain behaviors induce positive outcomes while others guarantee failure. For instance, the first chapter titled “No One’s Crazy” considers the limits of our understanding vis-à-vis the limits of our personal experiences. Consider that we are all, in the grander scheme of things, woefully inexperienced. “Your personal experiences with money make up maybe 0.00000000001% of what’s happened in the world, but maybe 80% of how you think the world works.” In other words, there’s a huge gap between firsthand knowledge and how we parlay those limited insights into making sense of the world. Our experiences color our judgment, but the foundations of that judgement are dubious, incomplete, and full of blind spots.

For example, consider two different people born in different decades and their attitudes towards the stock market, one born in the 1950s and the other in the 1970s. The first individual, as a teenager and young adult would have witnessed poor stock market returns of the 1960s-70s (low single digit returns in the decade aggregate). The second individual, as an adolescent and young adult, would have watched the double-digit returns for both the 1980s and 1990s. The latter is more likely to enter adulthood with a bullish attitude towards equities. The former is likely skeptical of the stock market having witnessed two decades of negligible returns. The lesson: you cannot discount the impact of personal experience on your decision-making process (nor can you discount the unique set of circumstances that influence the decisions made by others).

Housel’s book is filled with these sorts of lessons. Some lessons caution us against certain behaviors, other lessons encourage us to embrace beneficial habits. The beauty of these lessons is that they are accessible to anyone: they are not the sole domain of high-income earners or those with elite education degrees. Reading this book won’t give you a profound knowledge about investing instruments, asset allocation, or tax-advantaged strategies; it will, however, improve your relationship with money and your attitude regarding personal finance. It isn’t difficult, Housel assures us, financial wealth just requires discipline, patience, and a handful of constructive behaviors.

“The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave.”

“A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.”

Two contrasting examples:

Ronald James Read: Gas station attendant, janitor and American philanthropist. Saved throughout his life, lived frugally and amassed an $8 million net worth at time of death. The majority of his fortune was left to a local hospital and library.

Richard Fuscone: Harvard-educated Merrill Lynch executive. Borrowed heavily and spent lavishly, got hit by the 2008 financial crisis, declared bankruptcy.

“Ronald Read was patient; Richard Fuscone was greedy. That’s all it took to eclipse the massive education and experience gap between the two.”

Knowing how to do something is insufficient. In many situations you also need to battle against your internal emotional and mental turmoil as well which will influence or alter your planned response.

“We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).”

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