psychology of money by morgan housel book summary

The Psychology of Money by Morgan Housel

Summarized by Vishal Kataria

The Book in One Paragraph

We all want to achieve financial success because it offers independence: the freedom to do what we want, when we want. Unfortunately, such success seems beyond our grasp because we cannot understand how money works. But it’s not a hard science; financial success is a soft skill where how you behave is more important than what you know. Like every soft skill, it can be learned, which is what this book aims to help you do.

The Psychology of Money Book Summary

This is my book summary of The Psychology of Money by Morgan Housel. It contains quotes, key takeaways, and lessons for me from the book.

  • According to research, investors’ willingness to take risks depends on their personal history. Not intelligence, education, or sophistication. Just the dumb luck of when and where you were born.

  • For instance, most people who lived through the Great Depression might consider investing in stocks as taboo. On the other hand, youngsters who began investing after the 2008 recession have a much higher appetite for risk. (This philosophy could also explain why many elderly folk in India are still obsessed with real estate, even though the stock market has historically yielded higher rewards.)

  • Often, we attribute others’ failures to bad decisions, but our own failures are usually chalked up to the dark side of risk. This is also known as the Fundamental Attribution Error, where we cut ourselves 100% slack by blaming circumstances when we make the same mistake that we attribute to others’ character when they make it.

  • Not all success is due to hard work, and not all poverty is due to laziness. Luck and risk play influential roles in many outcomes.

  • Focus less on specific individuals and case studies and more on broad patterns. The more extreme an outcome someone else has experienced, the less likely you can apply it to your own life, because bright chances are the outcome was influenced by extreme luck or risk.

  • Thus, trying to emulate Warren Buffett and Elon Musk won’t get you too far. On the other hand, the observation that people who have more control over their time are happier in life is broad enough for you to do something with it.

  • There is no reason to risk what you have and need for what you don’t have and don’t need.

  • If your expectations rise with the results, you’ll keep pushing the goalpost forward and never know when you have enough. And without a sense of enough, life is not fun.

  • When compounding isn’t intuitive, we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider compounding potential. (This powerful truth applies to work, relationships, personal goals, and investing.)

  • Most financial advice is about today. But in the vast scheme of things, today, tomorrow, or the week after when things are going well, are not that important. What will matter more in your lifetime as an investor is what you do during the small number of days—likely 1% of the time or less—when everyone else around you is going crazy.

  • More than your salary, the size of your house, or the prestige of your job, control over what doing what you want, when you want to, with people you want to, is the broadest lifestyle variable that makes people happy.

  • Wealth is the difference between your income and your spending. Possessions don’t give the real picture of wealth. Often, it lies in the hidden things. The income not spent, the option not taken to buy something even if it can be afforded.

  • We see wealthy people who also spend a lot of money, but we don’t see the money they didn’t spend. We see the cars they drive and the schools they send their kids to. We don’t see their savings, retirement accounts, or investment portfolios. We see the houses they live in, not the ones they could’ve bought had they stretched themselves thin.

  • Intelligence is no longer a reliable advantage in a world as connected as ours. But flexibility is. It enables you to wait for good opportunities, both in your career and for your investments. You have a better chance of being able to learn a new skill when it’s necessary, and have more leeway to find your passion and niche at your own pace.

  • The world is governed by odds, not certainties. And margin of safety — or room for error — is the only effective way to navigate such a world. You have to take risks to get ahead, but avoid the ones that can wipe you out.

  • The biggest point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future. (And your future expenses will always be more than you anticipated.)

  • Like everything worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which appear easy to overcome until you’re dealing with them in real time. Thinking of market volatility as a fee rather than a fine is important to develop a mindset that lets you stick around long enough for the gains from investing to work in your favor.

  • Part of why bubbles like the dotcom and the sub-prime crisis are hard to learn from is that they are not like cancer, where a biopsy gives us a clear warning and diagnosis. They are closer to the rise and fall of a political party, where the outcome is known in hindsight but the cause and blame are never agreed upon.

  • Optimism is not the blind belief that everything will be great. It’s a belief that the odds of a good outcome are in your favor over time despite setbacks along the way.

  • Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and a loss of confidence, which can happen in an instant. That’s why we obsess over doom and pessimism and often ignore growth and optimism.

  • Many people think getting rich is the only way to achieve freedom. But you can become independent without making a lot of money. You just have to make sensible, reasonable decisions consistently and trust the principle of compounding to do its thing.

About The Author

Vishal Kataria is a writer and podcaster who shares lessons he has learned about productivity, learning new skills, and self-improvement.

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