[YS Learn] Key takeaways from Morgan Housel’s ‘The Psychology of Money’

‘The Psychology of Money’ by Morgan Housel focusses on how people view money, why they take debt, and how they can create and save wealth. Unlike other books that talk about interest rates, stock markets, etc., Morgan’s book says — “To grasp why people bury themselves in debt, you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism.”

The author believes that behaviour trumps any other considerations in the pursuit of financial success. He adds that doing well with money is more about how you behave rather than how smart you are. Engaging in the right behaviour will help you succeed in achieving your financial goals. 

Through its different chapters, the book looks at an individual’s attitude towards money, and how it affects their behaviour.  

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Some of the key takeaways of the book are:

The limits of understanding and our personal experience

“A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy, if they have a handful of behavioural skills that have nothing to do with formal measures of intelligence,” says Morgan. 

He explains, “Your personal experiences with money make up maybe 0.00000000001 percent of what’s happened in the world, but maybe 80 percent of how you think the world works.” This means, there is a huge gap between firsthand knowledge and how we use those insights into making sense of the world. 

It is our experiences that can colour our judgement. But, the foundation of this judgment is full of blind spots that make it incomplete and dubious. 

“No amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty,” he adds.

Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works. Now, this could mean incomplete information — someone who isn’t good at mathematics, or someone who is persuaded by marketing, he explains. 

Few people make their financial decisions with a spreadsheet. In fact, they are mostly made at the dinner table or in company meetings. Morgan adds that many of the poor financial decisions we make come from our collective inexperience — “There are no decades of accumulated experience… we’re winging it.” 

Nothing is as good or as bad as it seems 

“Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort,” says Morgan. Quoting NYU professor Scott Galloway, he says, “Nothing is as good or as bad as it seems.” 

He explains that luck and risk are so similar that you can’t believe in one without equally respecting the other.  

“If you give luck and risk their proper respect, you realise that when judging people’s financial success — both your own and others — it never is as good or as bad as it seems.” 

Therefore, it is important to focus less on specifics and more on broader patterns. He explains that most of the extreme outcomes are low probability outcomes. Thus, looking at the lessons of those who achieved these outlier results isn’t helpful as forces of luck and risk may have played non-replicable roles.

It, thus, becomes important to look at broad patterns that offer directional insights. 

You always want more 

“The hardest financial skill is getting the goalpost to stop moving,” says Morgan. He explains there is no need to risk what you have, and need for what you don’t have and don’t need. The problem arises when you end up comparing yourself to others. Having enough isn’t about making do without something; it means you avoid doing something that you will later regret. 

Thus, it is important to not play the game. “Enough is realising that the opposite — an insatiable appetite for more — will push you to the point of regret.” 

He adds, “There are many things never worth risking, no matter the potential gain. Freedom, reputation, independence, loved ones, family and friends, and happiness are invaluable.” 

The power of compounding

“$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday. Our minds aren’t built to handle such absurdities,” says Morgan. The point here is that Warren Buffett wasn’t just a good investor, he has been a good investor for over 75 years. 

As Morgan explains, if something compounds — if a little growth serves as the fuel for future growth — a small starting base can lead to results so extraordinary that they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to. 

“Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years, and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time.”