Lessons from "The Psychology of Money"
Timeless lessons on wealth, greed, and happiness by Morgan Housel
I’m taking a weekly break from my frameworks (read my latest on Probabilistic Thinking” to dive into a recent book I read “The Psychology of Money” by Morgan Housel. I’m dissecting into a series of quotes, thoughts, and summary below. Hope you enjoy!
Top Quote:
Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.
Thoughts:Your Circle of Competence is an important concept to be able to really understand what you don’t know. Highly recommend thinking about this.
Top Quote:
Few topics offer a more powerful magnifying glass that helps explain why people behave the way they do than money. It is one of the greatest shows on Earth.
Thoughts: Money is absolutely fascinating. I’m obsessed with it because it’s a gateway into all kinds of areas: psychology, investing, technology, the past, the future, etc. You name it and it touches money.
Top Quote:
The hardest financial skill is getting the goalpost to stop moving.
Thoughts: This is really a tough one to grapple with, especially if you’re younger and hungry for more money, power, prestige, etc. I know someone who recently retired and took their savings out of stocks and into bonds — they could have easily made high six figures from the recent gains in the market over the last year. But they don’t care! That’s where you want to be.
Top Quote:
Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
Thoughts: Project Management: the art of herding cats on an ever changing field.
Top Quote:
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
Thoughts: I love this definition of wealth. It’s definitely something to aspire for!
Top Quote:
Rich is a current income. Someone driving a $100,000 car is almost certainly rich, because even if they purchased the car with debt you need a certain level of income to afford the monthly payment. Same with those who live in big homes. It’s not hard to spot rich people. They often go out of their way to make themselves known. But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.
Thoughts: I think there are a lot of people in this world who appear ‘rich’, but are really living paycheck to paycheck in ‘great’ jobs they can’t stand. To be in this position of ‘optionality’ is where you want to be! Rather than flaunting your new car or watch.
Top Quote:
The historical odds of making money in U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods. Anything that keeps you in the game has a quantifiable advantage.
My interpretation: Invest in index funds! Vanguard has some great options that I’ve used for 10+ years that are low-cost and easy.
Top Quote:
The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff. But specific trends, specific trades, specific sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Historians are not prophets.
Thoughts: It’s important to recognize what are the impacts of decisions as I wrote about recently in “Second-order thinking”. We can lean in too much into our own biases and understanding of history.
Top Quote:
We should also come to accept the reality of changing our minds. Some of the most miserable workers I’ve met are people who stay loyal to a career only because it’s the field they picked when deciding on a college major at age 18. When you accept the End of History Illusion, you realize that the odds of picking a job when you’re not old enough to drink that you will still enjoy when you’re old enough to qualify for Social Security are low.
Thoughts: I love this. I recently worked with a home inspector who has a PhD in Chemistry. There are lots of opportunities to change and grow in your life and career.
Top Quote:
Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it.
Thoughts: We were taught TINSTAAFL in high school economics and it has stuck with me forever: There is no such thing as a free lunch. Everything costs something.
Top Quote:
The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
Thoughts: Yes - important to realize what are the incentives of any situation. If you ask a barber if you need a hair cut, what kinda advise you think you’ll get?
Top Quote:
Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.
Thoughts: Living a life where you are able to say “No” to things is a powerful thing. Money gives you options. It’s great to love what you do or where you are, but people change. Money/saving gives you the flexibility to weather storms.
Top Quote:
Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.
Thoughts: Words to live by!
Summary:
My rating: 9.5/10
Should I read this? I think it’s a great book that is filled with tons of advice and wisdom. I highly recommend!