# 121 Notes on The Psychology of Money (Review & Quotes Included From the Book)

Timeless Lessons on Wealth, Greed, and Happiness

The Psychology of Money was published in 2020 authored by Morgan Housel. He is a partner at Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal.

The book currently (according to Amazon.com) is a best seller ranked:

• #1 in Money Management & Budgeting
• #2 in Budgeting & Money Management
• #2 in Investing & Trading

This book helps you understand what money really is from the perspective of psychology, not finance or academic definitions. It clarifies that money is more about human behavior than being smart.

On a personal level, The Psychology of Money helped me remember some concepts I learned when I was reading Rich Dad, Poor Dad by Robert Kiyosaki.

In this blog post, I'll compile my notes on the book that has 21 main points:

1. Introduction
2. No One's Crazy
3. Luck & Risk
4. Never Enough
5. Confounding Compounding
6. Getting Wealthy vs Staying Wealthy
7. Tails, You Win
8. Freedom
9. Man in the Car Paradox
10. Wealth is What You Don't See
11. Save Money
12. Reasonable > Rational
13. Surprise!
14. Room for Error
15. You'll Change
16. Nothing's Free
17. You & Me
18. The Seduction of Pessimism
19. When You'll Believe Anything
20. All Together Now
21. Confessions

I will include, as always, quotes from the book and my personal notes and will leave my review at the end.

## Introduction

The premise of this book is that doing well with money has little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.

• Ronald James Read, a man who was working at a gas station for 25 years and swept floors for 17 years and then left $2M to his stepkids and$6M+ to his local hospital and library. How? He invested in stocks!
• Richard Fuscone, Harvard-educated MBA who retired in his 40s to become a philanthropist. In 2008, when the financial crisis hit, he was broke.
• Two possible explanations here:
1. Financial outcomes are driven by luck, independent of intelligence and effort.
2. Financial success is not hard science. It's a soft skill, where how you behave is more important than what you know.
• The problem is that we treat money too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).

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. To get why investors sell out at the bottom of a bear market you don't need to study the math of expected future returns; you need to think about the agony of looking at your family and wondering if your investments are imperiling their future.

## No One's Crazy

You know stuff about money that I don't, and vice versa. You go through life with different beliefs, goals, and forecasts, from what I do. That's not because one of us is smarter than the other, or has better information. It's because we've had different lives shaped by different and equally persuasive experiences.

• Money decisions are so difficult. We should recognize how new this topic is.

Money has been around a long time. King Alyattes of Lydia, now part of Turkey, is thought to have created the first official currency in 600 BC. But the modern foundation of money decisions — saving and investing — is based around concepts that are practically infants.

Before World War II most Americans worked until they died. That was the expectation and the reality. The labor force participation rate of men age 65 and over was above 50% until the 1940s.

We all do crazy stuff with money because we're all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy — we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

## Luck & Risk

• Bill Gates went to Lakeside School (one of the only high schools in the world that had computers at that time).

If there had been no Lakeside, there would have been no Microsoft ~ Gates to the school's graduating class in 2005

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can't believe in one without equally respecting the other.

Years ago I asked economist Rober Shiller, who won the Nobel Price in economics, "What do you want to know about investing that we can't know?" "The exact role of luck in successful outcomes," he answered.

• Mark Zuckerberg turned down Yahoo!'s 2006 $1 billion offer to buy his company. "The customer is always right" and "customers don't know what they want" are both accepted business wisdom. • Study broad patterns rather than individuals because we tend to study extreme examples — the billionaires, the CEOs, or the massive failures. • Example of broad pattern: having control over time which tends to a result of happiness. ## Never Enough • Having "enough" has no limit yet so smart and so powerful. • Rajat Gupta and Bernard L. Madoff bot were worth$100 million yet they were so desperate for more money that they risked everything in pursuit of even more. They had no sense of enough.
• Happiness = results - expectations
• Social comparison is the problem of not having enough; Everyone looks at who is worth more money. Jeff Bezos's net worth equates to more per hour than the "rich" baseball player makes in a full year.

The point is the ceiling of social comparison is so high that virtually no one will ever hit it. This means it's a battle that can never be won, or that the only way to win is to not fight to begin with — to accept that you might have enough, even if it's less than those around you.

The only way to know how much food you can eat is to eat until you're sick. Few try this because vomiting hurts more than any meal is good. For some reason, the same logic doesn't translate to business and investing, and many will only stop reaching for more when they break and are forced to.

After he was released from prison Rajat Gupta told The New York Times he had learned a lesson: Don't get too attached to anything — your reputation, your accomplishments or any of it. I think about it now, what does it matter? O.K. this thing unjustly destroyed my reputation. That's only troubling if I am so attached to my reputation.

## Confounding Compounding

• You don't need tremendous force to create tremendous results.

More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett's fortune isn't due to just being a good investor, but being a good investor since he was literally a child.

• Warren Buffett's skill is investing but his secret is time. That's how compounding works.

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.

• From 1950 to 1990: we gained 296 megabytes in hard drives. From 1990 through today (2020), we gained 100 million megabytes.

## Getting Wealthy vs Staying Wealthy

There are a million ways to get wealthy, and plenty of books on how to do so. But there's only one way to stay wealthy: some combination of frugality and paranoia. And that's a topic we don't discuss enough.

• Jesse Livermore was the greatest stock market trader of his day. By age 30, he was worth ~$100M. • Abraham Germansky was a multimillionaire real state developer. • The October 1929 crash ruined Germansky, perhaps taking his life while it made Livermore one of the richest men in the world. After ~4 years, Livermore took his own life! The timing was different, but Germansky and Livermore shared a character trait: They were both very good at getting wealthy, and equally bad at staying wealthy. Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you've made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you've made is attributable to luck, so past success can't be relied upon to repeat indefinitely. • Rick Guerin was investing with Buffett, but he didn't have the skill of staying wealthy; he was in a hurry. ## Tails, You Win Out of more than 21,000 venture financings from 2004 to 2014: 65% lost money. 2.5% of investments made 10x-20x. 1% made > 20x return. 0.5% made (about 100 companies out of 21,000) earned 50x or more. That's where the majority of the industry's returns come from. This, you might think, is what makes venture capital so risky. And everyone investing in VC knows it's risky. Most startups fail and the world is only kind enough to allow a few mega successes. If you want safer, predictable, and more stable returns, you invest in large public companies. A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy. Something I've learned from both investors and entrepreneurs is that no one makes good decisions all the time. • Jeff Bezos, after the disastrous launch of Amazon's Fire Phone, said: If you think that's a big failure, we're working on much bigger failures right now. I am not kidding. Some of them are going to make the Fire Phone look like a tiny little blip. "It's not whether you're right or wrong that's important," George Soros once said, "but how much money you make when you're right and how much you lose when you're wrong." You can be wrong half the time and still make a fortune. ## Freedom A small amount of wealth means the ability to take a few days off work when you're sick without breaking the bank. Gaining that ability is huge if you don't have it. More still means the ability to take a job with lower pay but flexible hours. Maybe one with a shorter commute. Or being able to deal with a medical emergency without the added burden of worrying about how you'll pay for it. Then there is retiring when you want to, instead of when you need to. Doing something you love on a schedule you can't control can feel the same as doing something you hate. • Jonah Berger, a marketing professor at the University of Pennsylvania, said: People like to feel like they're in control — in the drivers' seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along. • (Book recommendation) 30 Lessons for Living by Karl Pillemer • To be happy, it's not about working as hard as you can to make money to buy things you want. Not when you have more money than people around you. Not when your work is based on your desired future earning power. To be happy is to have quality friendships, be part of something bigger than yourself, spend quality, unstructured time with your children. ## Man in the Car Paradox When you see someone driving a nice car, you rarely think, "Wow, the guy driving that car is cool." Instead, you think, "Wow, if I had that car people would think I'm cool." Subconscious or not, this is how people think. • The point is not to abandon the pursuit of wealth. It's realizing that humility, kindness, and empathy will bring you more respect than horsepower ever will. ## Wealth is What You Don't See Someone driving a$100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car (or$100,000 more in debt). That's all you know about them.

We tend to judge wealth by what we see because that's the information we have in front of us. We can't see people's bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Instagram photos.

The truth is that wealth is what you don't see. Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven't yet been converted into the stuff you see.

When most people say they want to be a millionaire, what they might actually mean is "I'd like to spend a million dollars." And that is literally the opposite of being a millionaire.

• Being 'wealthy' is different than 'rich'. Wealthy is having income not spent. Rich is what we see.

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.

• (Book recommendation) The Body by Bill Bryson

We don't see savings, retirement accounts, or investment portfolios. We see the homes they bought, not the homes they could have bought had they stretched themselves thin.

People are good at learning by imitation. But the hidden nature of wealth makes it hard to imitate others and learn from their ways.

## Save Money

A high savings rate means having lower expenses than you otherwise could and having lower expenses means your savings go farther than they would if you spent more.

Spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money. Think of it like this, and one of the most powerful ways to increase your savings isn't to raise your income. It's to raise your humility.

Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.

Intelligence is not a reliable advantage in a world that's become as connected as ours has. But flexibility is.

• Having flexibility will make you wait for a good opportunity. You'll have a chance to learn a new skill. You'll have less urgency to chase competitors. You'll have a new routine and can withstand a slower pace.

## Reasonable > Rational

Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.

## Surprise!

• Appreciate economic and investing history, but beware that history is not a map for the future.
• Investors have feelings. That's why it's hard to predict the future of investing.
• (Book recommendation) Fooled by Randomness by Nassim Taleb
• Making mistakes should teach you that the world is difficult to anticipate; the world is surprising.
• We should learn from past surprises as an admission that we have no idea what might happen next.
• We're currently in the COVID recession; which started 12 years after the last recession in December 2007.
• Recent history is often the best guide to the future because it's more likely to include important conditions that are relevant to the future.

The four most dangerous words in investing are, "it's different this time."

## Room for Error

• A margin of safety is seeing the world as a gray area; to pursue things where a range of potential outcomes are acceptable.

I assume the future returns I'll earn in my lifetime will be 1/3 lower than the historic average. So I save more than I would if I assumed the future will resemble the past. It's my margin of safety. The future may be worse than 1/3 lower than the past, but no margin of safety offers a 100% guarantee.

• In 1942, Only 20 German tanks out of 104 were operable. The rest were defeated by mice. Mice ate away the insulation covering the electrical systems.

The trick that often goes overlooked — even by the wealthiest — is what we saw in chapter 10: realizing that you don't need a specific reason to save. It's fine to save for a car, or a home, or for retirement. But it's equally important to save for things you can't possibly predict or even comprehend — the financial equivalent of field mice.

The most important part of every plan is planning on your plan not going according to plan.

## You'll Change

• People are poor forecasters of their future selves.

At every stage of our lives we make decisions that will profoundly influence the lives of the people we're going to become, and then when we become those people, we're not always thrilled with the decisions we made.

• (Book recommendation) Thinking, Fast and Slow by the psychologist Daniel Kahneman

When you consider our tendency to change who we are over time, balance at every point in your life becomes a strategy to avoid future regret and encourage endurance.

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.

## Nothing's Free

• "Every job looks easy when you're not the one doing it." General Electric's CEO in 2011, Jeff Immelt said.
• (Book recommendation) Straight From the Gut by Jack Welch
• Many people who can pay for cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns. That's because the price of investment success is not immediately obvious.
• Consider market volatility as a fee rather than a fine.

## You & Me

• (Book recommendation) Bull! A History of the Boom and Bust, 1982-2004 by Maggie Mahar
• During the housing bubble of the mid-2000s:

It's hard to justify paying $700,000 for a two-bedroom Florida track home to raise your family in for the next 10 years. But it makes perfect sense if you plan on flipping the home in a few months into a market with rising prices to make a quick profit. Which is exactly what many people were doing during the bubble. When a commentator on CNBC says, "You should buy this stock," keep in mind that they do not know who you are. Are you a teenager trading for fun? An elderly widow on a limited budget? A hedge fund manager trying to shore up your books before the quarter ends? ## The Seduction of Pessimism Real optimists don't believe that everything will be great. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. Tell someone that everything will be great and they're likely to either shrug you off or offer a skeptical eye. Tell someone they're in danger and you have their undivided attention. • (Book recommendation) The Rational Optimist by Matt Ridley • (Book recommendation) Factfulness by Hans Rosling with Anna Rosling Rönnlund and Ola Rosling Stocks rising 1% might be briefly mentioned in the evening news. But a 1% fall will be reported in bold, all-caps letters usually written in blood red. And while few questions trying to explain why the market went up — isn't it supposed to go up? — there is almost always an attempt to explain why it went down. There are two topics that will affect your life whether you are interested in them or not: money and health. While health issues tend to be individual, money issues are more systemic. In a connected system where one person's decision can affect everyone else, it's understandable why financial risks gain a spotlight and capture attention in a way few other topics can. Pessimists often extrapolate present trends without accounting for how markets adapt. Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about. ## When You'll Believe Anything If there a 1% chance that someone's prediction will come true, and if coming true will change your life, it's not crazy to pay attention — just in case. These may be low-probability bets. The problem is that viewers can't, or don't, calibrate low odds, like a 1% chance. • (Book recommendation) Why Don't We Learn From History? by B. H. Liddell Hart Carl Richards writes: "Risk is what's leftover when you think you've thought of everything." We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs. ## All Together Now • (Book recommendation) The Silent World of Doctor and Patient by Dr Jay Katz "Medicine is a complex profession and the interactions between physicians and patients are also complex." You know what profession is the same? Financial advice. I can't tell you what to do with your money, because I don't know you. I don't know what you want. I don't know when you want it. I don't know why you want it. ## Confessions Sandy Gottesman, a billionaire investor who founded the consulting group First Manhattan, is said to ask one question when interviewing candidates for his investment team: "What do you own, and why?" Charlie Munger once said "I did not intend to get rich. I just wanted to get independent." Independence, to me, doesn't mean you'll stop working. It means you only do the work you like with people you like at the times you want for as long as you want. Comfortably living below what you can afford, without much desire for more, removes a tremendous amount of social pressure that many people in the modern first world subject themselves to. One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results. The reason is that the world is driven by tails — a few variables account for the majority of returns. ## Review What I don't like about this book is when the author talks about investing examples, it seems those examples are not clear for beginners; they might be harder for people who don't have much experience in investing to understand the examples he explains. But in general, the book is doing a great job explaining it in a clear way that we should change our behavior when we look at money. The most important two lessons I learned from this book are (a) You need to save money for the unprepared future. You don't need a specific reason to save. (b) Also to consider market volatility as a fee rather than a fine. For example, when you go to a park with your children and the ticket is$100, this ticket is a fee to make you and your kids enjoy the day. This is not a fine at all!

You can find The Psychology of Money on Amazon