The Psychology of Money by Morgan Housel: Review and summary

The Psychology of Money by Morgan Housel

Summary and Review of The Psychology of Money by Morgan Housel

In this post, we will share with you the summary and review of The Psychology of Money written by Morgan Housel. It is one of the best self-help books regrading finances and money like Thinking Fast and Slow. Let’s go towards the summary.

Let me tell you the story of Richard and Ronald. Richard graduated from Harvard, landed a job as an executive at a big corporation. In a few years, lived in a mansion with two swimming pools, two elevators, 11 bedrooms, and a seven-car garage. On the other end, Ronald was a gas station attendant, worked as a mechanic, and after retiring he got a part-time job as a janitor.

Let me ask you, which one of these men do you think he had an eight million net worth at the time of their death? And I know what you’re thinking, but the correct answer is Ronald. Ronald Reid, the part-time janitor. Did he win the lottery? Nope. He lived his entire life frugally while quietly investing any extra income he could save in the stock market and then holding his position for decades.

The moral of the story is that you do not need a Ph.D. in finance, business and economics to get rich. And you certainly don’t need to earn a massive paycheck to become a millionaire. The reality is that knowing how to do something isn’t enough. Why? Because the world is not black and white. Furthermore, you also need to battle against your internal emotions, which will influence every response. And the same applies to money. We’re thinking about money in ways that are way too much like physics, with rules and laws and not enough psychology.

The author, Morgan Housel believes that’s exactly where the secret to getting rich is in The Psychology of Money. Let’s dive right into the book to see how you can be more like Ronald and less like Richard.

The Psychology of Money by Morgan Housel

Take away # 1

No one is crazy- Everyone looks at money through the lens of their own past experiences.

Everyone has a unique idea of how the world works. And this view is influenced by a unique set of values, circumstances, and external influences. For example, someone who was born in the fifties, saw a flat stock market during their twenties. But someone born in their seventies saw the S&P 500 increase 1000% during their teens and twenties.

So which generation is more like to have a bullish view on the stock market? Their view of the stock market is different because it was formed in a different world. And the same applies to you. You’re not a spreadsheet, you’re a person. You’re a screwed-up, emotional new person. Your reality is your reality. And it’s neither correct nor wrong, it’s just different from person to person. So, always keep that in the back of your mind and especially when someone is giving you financial advice.

Take away # 2

Be reasonable, not rational.

In other words, don’t aim to be cold irrational, aim to be just pretty reasonable. You might have heard people saying that if you want to be a successful investor, you need to be rational. According to the author, being rational means being passionless and it means you might sell a stock when it’s going down, instead of keeping it and making more in the long run.

Let me give an example. John is a 50-year-old man who bought some Apple stock back in 2007 at the price of about $6 per share. Just a year later the stock was worth $3.70. And if John is purely rational, he would’ve probably sold it all. The economy had crashed and things didn’t look so good. However, John was a pretty reasonable investor who knew Apple’s worth and believed it can bounce back. So he decided to wait. And today, well, he’s probably in The Bahamas, sipping piña coladas.

Being a little reasonable instead of being just rational will make your investment journey all more pleasant and give you an extra edge.

Take away # 3

Never enough- Life isn’t fun without a sense of enough.

Many people claim that if you focus on earning more you don’t have to worry about expenses. And while that approach might work for some the question is, when would all this be enough?

Let’s look at our friend, Mike as an example, a young man who doesn’t really own anything just yet. Mike is also not particularly happy. He wants a nice car and a big house just because he believes this is where happiness will find him. Would it though? We all know life is not that simple. Once Mike gets the car he’ll want a better one, a faster one, a second one. And if Mike gets all those he’ll want a helicopter and a jet, it is just human nature. Some people hold unimaginable amounts of money, risk everything to get even more money.

The lesson is, don’t risk what you have for what you don’t need because social comparison is a game you can never win. Understand what is actually enough for you and your loved ones and then focus on enjoying life.

Take away # 4

Getting wealthy versus staying wealthy.

Getting money and keeping money is too in entirely different things and require entirely different mindsets and strategies. Getting money requires taking risks, being optimistic, and putting yourself out there. Staying wealthy is all about survival. And if you want to have a survival mindset, you need to do these three things.

1 Aim to be what the author calls “financially unbreakable”. The stock market will play with your emotions, it’s just part of the game. The most reliable way to make money is to stay consistent and to remain calm.

2 Leave room for error. According to the author, a plan is only useful if it can survive reality, and a future filled with unknowns is everyone’s reality. Make your financial plans with a margin of safety. If covering your monthly expenses requires $5,000 for example, plan for 5,500, at least.

3 Be optimistic. Be optimistic about the future, but paranoid about the obstacles to your success. The author suggests that the optimal worldview is in the sweet spot that he calls “sensible optimism”, where paranoid keeps you humble enough to expect trouble. However, optimism makes you confident enough that if you adapt to whatever troubles you face, you’ll be okay.

Take away # 5

Tails, you win- You can be wrong half of the time and still make a fortune.

You’ve probably never heard of a person called Heinz Berggruen, but he was one of the most important German art dealers of all time. And everyone was amazed by his art collection and especially by how he always managed to buy the right pieces at the right price.

The reality was that he bought massive quantities of art and only a part of his collection was actually valuable. The lesson is, he was wrong most of the time and still ended upright. Even Warren Buffet, who owned 4 to 500 stocks during his entire life, made the majority of his money on about 10 of them.

You see, you can be wrong half of the time, if not more, and still, make a fortune. Cut back on the mentality of all or nothing and you’ll do much better, both emotionally and financially.

Take away # 6

Save money.

Remember the story of Ronald Reid from the beginning of this post? He proved that building wealth has little to do with your income or investment returns, and more to do with your savings rate. According to the author, past a certain level of income, what you need is just what sits below your ego.

The solution? Aim to improve your savings rate instead of trying to keep up with the Kardashians, with the Joneses, or just with the next-door neighbor. It is not about how much you make. It is about how much you save.

Take away # 7

You will change.

In other words, long-term planning is hard because people change, accept that. We’re such poor forecasters of our future selves, but somehow we keep thinking we can plan everything. So, try not to decide how you will live your life in 30 years. Instead, allow yourself to live your best life now.

Nobody can predict what’s going to happen in 30 minutes, in one hour, in one day, let alone in 30 years. So focus on enjoying your life right now, instead of postponing happiness for retirement or 50 years down the line.

You will change, your ideas will change, your goals will change, and there is no way to forecast what will happen in three decades from now. Accept that and leave your life now.

So this was the summary and review of The Psychology of Money by Morgan Housel. I hope you enjoyed it. Visit our website for more books summary and reviews.

ote: Must read Summary of Book Zero to One by Peter Thiel


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