54 pages 1 hour read

Morgan Housel

The Psychology of Money

Nonfiction | Book | Adult | Published in 2020

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Summary and Study Guide

Overview

The Psychology of Money is a bestselling 2020 book by American finance expert Morgan Housel. Housel’s book examines people’s financial decisions through the lenses of history and psychology. Housel argues that financial management is a relatively new phenomenon that everyone approaches differently depending on their personal experiences, beliefs, and biases. According to Housel, people who do not have a formal financial education can still succeed financially by learning the “psychology of money” (9). Housel uses historical anecdotes to illustrate how people’s relationship with ego, risk, patience, and effort can make or break their financial success and ends each chapter with a recommendation to the reader. The author urges the reader to plan for the future by holding long-term diversified stock portfolios and allowing them to compound, saving for the future, and operating with a margin for error. He also warns against an egotistical approach to finance, recommending that readers forgo spending on flashy status symbols, avoid extreme risk-taking, and maintain a humble and wary attitude about the future.

This SuperSummary guide uses the 2020 Harriman House Kindle edition of The Psychology of Money.

Summary

In the Introduction, Housel contrasts two American men with vastly different lives and financial outcomes. One, Ronald Read, was an uneducated janitor and car mechanic who lived frugally and invested in blue chip stocks over the course of his career. Read became famous in his hometown when he passed away and left millions of dollars to local organizations in his will. The other man, Richard Fuscone, was a finance professional who lost everything in the 2008 financial crisis due to his overspending. Housel uses these examples to support his argument that financial success does not require a formal education or even a high income—rather, it is a “soft skill” that anyone can learn.

In Chapter 1, “No One’s Crazy,” Housel emphasizes how people’s different backgrounds and childhood experiences inform their perception of money, risk, and financial management. Housel contrasts the experiences of the average American during the Great Depression with that of President J. F. Kennedy, who grew up wealthy in the 1930s. He cites a psychological study that found that people’s experiences as young adults greatly influence their financial decisions for the rest of their lives. In Chapter 2, “Luck and Risk,” Housel argues that luck and risk are “siblings” that both have a profound impact on individual financial journeys. He believes that people overlook the role they play in success and failure, since there is too much focus on people’s decisions and efforts. In his third chapter, “Never Enough,” Housel recommends that the reader carefully consider their needs and desires and keep their ambition in check. He laments that many financially-successful people cannot appreciate their wealth because they envy those wealthier than themselves and try to accumulate more wealth and possessions.

In Chapter 4, “Confounding Compounding,” Housel underlines the importance of compounding to most people’s financial success. People benefit most from compounding when they make long-term deposits or investments. Housel uses Warren Buffet, who began investing at age 10, as an example of how long-term compounding can yield amazing results. In the following chapter, the author argues that people focus too much on attaining wealth and seldom consider the best ways to stay wealthy. He recommends maintaining a “bar-belled” approach to finance: being optimistic and somewhat risk-taking to attain wealth, while remaining wary, frugal, and fearful in order to keep it. In Chapter 6, “Tails, You Win,” Housel examines the role of “tails” in stories of extreme financial success, such as Walt Disney. Housel defines a “tail” as a very rare occurrence, again emphasizing the role of luck or chance in finance. He uses this analysis to remind the reader to not focus on the success stories of specific individuals, but to try to emulate the more general patterns of moderate success that everyday people tend to enjoy.

In Chapter 7, “Freedom,” Housel argues that freedom and a sense of control over one’s life is the best thing that money can buy. He cites research that shows that people who feel in control of their life tend to be much happier than those who lack freedom and independence. He uses this observation to support his argument that saving for the future should be a top priority for people of all income levels. In Chapter 8, “The Man in the Car Paradox,” Housel explains that when people see someone driving an expensive car, they imagine themselves driving it, rather than admire the driver. He urges the reader to not waste money on status symbols like cars, clothes, or jewelry as a way to earn admiration from others, arguing that admiration can only be earned by behaving with respect and kindness.

Housel continues this line of thinking in Chapter 9, “Wealth is What You Don’t See,” in which he advocates for frugality and savings instead of liberal spending. He reminds the reader that it takes restraint to become wealthy, which should be prioritized over buying luxury items. In Chapter 10, the author makes the case for wealth-building through consistent savings. He argues that saving money is even more important for long-term wealth building than a high income, urging the reader to embrace the benefits of long-term compounding by consistently saving their money.

In the following chapter, Housel contrasts reasonable and rational approaches to financial management. He argues that while finances can be analyzed rationally, it is more realistic for most people to aim for a “reasonable” approach. For example, a rational retirement savings strategy might depend on borrowed money that would be very likely to increase in the long term, but it is unreasonable to expect people to be comfortable with that degree of risk, even if it is rational on paper.

In Chapter 12, “Surprise!” Housel reminds the reader of the unfortunate reality that there will always be negative events that cannot be predicted or planned for. Housel uses history’s financial downturns to show how conditions can change quickly and unexpectedly. He builds on this idea in Chapter 13, “Room for Error,” in which he recommends that everyone have a margin for error in their financial plans, since no one can ever be completely certain investments will work as expected. In Chapter 14, “You’ll Change,” Housel explains that people’s interests, professions, and short- and long-term goals change over the course of their lives, usually more than people expect them to. Instead of clinging to the same plans made when younger, it is better to keep finances flexible to reflect new goals.

In Chapter 15, “Nothing’s Free,” Housel gives the reader a realistic look at the ups and downs of stock market investing. As the chapter title suggests, Housel explains that, like everything else in life, investors pay a price to invest with the stock market: losing money on poor investments. Housel encourages the reader to see losses as fees they pay to participate in the system, since everyone experiences them and they are inherent to the process of investing. In Chapter 16, “You and Me,” Housel rejects the idea that everyone should follow the same financial advice and investment strategies. He argues that day-traders and people with short-term goals should have a different approach from the average person saving for their long-term plans. He claims that “bubbles” are a natural result of market trading, only becoming damaging when long-term traders with one set of goals begin imitating day traders, who plan to sell their stocks within short time frames.

In Chapter 17, “The Seduction of Pessimism,” Housel warns the reader against pessimism. He notes that in spite of various financial depressions and recessions, the stock market has increased 17,000-fold in the last century. Housel believes humans are biased to pay more attention to negative events; furthermore, unfortunate events tend to happen quickly while beneficial growth happens over a long period of time. The author expands his analysis of people’s biases in his next chapter, “When You’ll Believe Anything.” He warns the reader against becoming overconfident, since no one knows what they do not know, and everyone is operating with incomplete information. He also observes that people tend to favor analyses that they want to be true, which can cause flawed decision-making.

In Chapter 19, “All Together Now,” Housel reviews the tips he has covered in his work so far. He follows this with “Confessions,” in which he explains his own approach to his personal finances. In this chapter, he reveals that his number one priority is independence. As such, Housel lives a fairly modest lifestyle that is far below his income, saving a great deal of his money to ensure he will have the freedom to make his own personal and professional choices. He also keeps a large amount of cash available to him, so that he does not have to worry about being unable to cover an unexpected expense. He shares that it is important to him to not have to sell stocks in order to deal with an emergency, since he wants the profits to compound for as long as possible.

In Chapter 21, Housel examines the worldview of the average American consumer through a historical lens. He notes that modern Americans tend to be too comfortable with debt and that there can be painful consequences to living beyond one’s means, which has become normalized in American society. Housel reveals how much people’s expectations about their finances have changed since WWll, focusing on how people are borrowing more to fund more lavish lifestyles. Housel concludes his work by noting that recent economic events give reason to be optimistic for the future: unemployment rates are decreasing, wages are increasing, and college costs have stagnated. He ponders how American consumers will factor these developments into their worldviews and their perspectives on their personal finances, noting that people’s expectations do not always reflect reality.

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