“Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness” is a book that provides a window to our minds when it comes to money matters. It explores the intersection of money, circumstances, human behavior, and life choices.
Morgan Housel is a well-known financial writer, author, and investor known for his insightful perspectives on personal finance and investing. He has been a columnist at The Motley Fool and The Wall Street Journal and is a partner at an investment firm called The Collaborative Fund.
The book is short in length - about 210 pages. Morgan Housel does a great job of keeping it simple and entertaining to read with real-life examples and anecdotes. His storytelling approach makes the book feel more like a series of engaging conversations. I found the book to be thought-provoking. It is the kind of book that will elicit a lot of opinions and conversations on many points.
It is NOT a traditional finance book in any sense. It won’t go into any complex financial or economic concepts. It won’t have any jargon or formulae explained to you. It’s a book that illustrates how we think and feel about allocating, saving, using, growing, and also showing off an important resource - money.
Another important aspect of this book is that it speaks about individual unique mindsets around wealth and money. Hence, it doesn’t offer any particular, pointed advice about what to do and what not to do. I wasn’t consciously looking to build mental models around these topics but that is what this book helped me do. If I was looking for strategies that I could have readily deployed out of this book, then I would have surely been disappointed.
A couple of overarching lessons that I learned from the book:
Room for error is important. Not just in matters of personal finance, but in all other day-to-day aspects too. Actively marking buffers in plans and treating them with due importance may or may not help us in surviving catastrophic low-probability events but they’ll definitely help us accommodate smaller high-probability shocks.
"Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”
Financial games played by everyone are unique single-player games. The goals are different, the timelines are different, the rules are different, the maps are different, the characters are different, and the resources at hand are different. Given this, it becomes extremely important to define your game, understand its objectives and rules and then make a strategy that would help. It is foolish to copy someone else’s moves, not thinking about whether they apply to your game or not.
Concepts that I liked from the book:
Being wealthy and being rich are differentiated. MH likens wealth to freedom. He argues that the best purpose wealth serves us is that it allows us to take control over our time and our choices. Contrarily, the pursuit of riches is argued to be unending and vain. By this view, wealth is the invisible accumulation of resources.
"The highest form of wealth is the ability to wake up every morning and say, 'I can do whatever I want today.'"
All our aspirations will have a price. The units of these prices could be different - money, time, physical and psychological load, currencies of reputation and social status, etc. This idea of trade-offs manifesting as different kinds of prices is accepted and brought to the fore. The book urges readers to be mindful of all these different kinds of prices, accept their existence, and then decide to act.
"Everything has a price but not all prices appear on labels."
The impact and visibility of luck, skill, and effort as contributing factors cannot be estimated properly. Due to our many cognitive biases and egos, we attribute both successes and failures quite poorly. Having a long time frame and an informed mindset around these concepts can help us position ourselves better for a favorable outcome.
The book explains how it’s stupid that we use history as a map for the future. Our imagination of how good or bad things can turn out to be gets limited by what's happened.
Additionally, you could look out for these aspects in the writing too:
Sharp one-liners are spread out all across the book. Some hook lines made me chuckle, some made me wonder and some made me go, “Wow!”
There are a lot of stories weaved together with data. Depending on the point he’s trying to make, Morgan Housel has chosen his tool appropriately.
Omissions, confusions, and points of disagreement:
This is a book that could be interpreted in many ways. Naturally, there were a few points I couldn’t fully understand -
The argument that urges readers to be reasonable rather than rational when it comes to money. The premise is that we’re emotional beings and our emotions sometimes get in the way of making an optimal choice. So the solution to that is to accept this and be fine with sub-optimal choices to keep playing a long game. Didn’t sit quite right with me. What am I not seeing correctly?
Another opinion that I didn't understand fully was that we don’t understand how to manage money any better than our ancestors. Is that really true? If, as a population, we don’t understand money any better than our ancestors, then how do we come up with modern complex instruments regularly?
Who would I recommend the Psychology of Money to:
Quite frankly, every adult. Everyone can read and understand this book. It isn’t technical. It’s light and entertaining to read, short and quite insightful. It’s also a book that will stay with you in your subconscious mind. I’d especially recommend this book to young adults - the ones who are just beginning to earn or manage their money.
Do let me know your experience of reading Psychology of Money if you read it hence or have already done so. I’d love to hear!
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