Book notes: The Psychology of Money by Morgan Housel

The Psychology of Money by Morgan Housel book summary review and key ideas.

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The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel


Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.

Money – investing, personal finance, and business decisions – is typically taught as a math-based field, where data and formulas tell us exactly what to do. But in the real world people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together.  

In The Psychology of Money, award-winning author Morgan Housel shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important topics.” -Audible

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Opening thoughts:

I thought this book was recommended by my friend Lindsey but I found out later on that she didn’t read it yet. Maybe I saw it somewhere else like on someone’s reading list or perhaps Audible recommended it. Either way, practical books like these are usually very interesting to me. I was excited to see what I could learn from this.

Key notes:

  • Doing well with money has little to do with how smart you are and a lot to do with how you behave
    • Behavior is hard to teach
  • Financial success is not a hard science, it’s a soft skill where how you behave is more important than what you know
    • He calls this soft skill the psychology of money
  • Two topics impact everyone whether you’re interested in them or not: health and money 
  • Finance isn’t controlled by laws like in physics, it is controlled by human behavior

Chapter 1: no ones crazy

  • Every single person has had different experiences that shaped their perspective about money, so we shouldn’t be judgmental when they behave differently
    • We all think we know how the world works, but we’ve only ever experienced a sliver of it
  • Some lessons have to be experienced before they can be understood

Chapter 2: luck & risk

  • Luck and risk are siblings
    • They’re both the reality that every outcome in life is guided by forces other than individual effort
    • Luck and risk are driven by the same thing
  • Nothing is as good or as bad as it seems
  • The line between bold and reckless can be thin
    • When we don’t give luck and risk their proper billing, it’s often invisible
  • Be careful when assuming that 100% of outcomes can be attributed to effort and decisions
  • The more extreme the outcome, the less likely you can apply its lessons to your own life because the more likely the outcome was influenced by the extreme ends of luck or risk
    • You’ll get closer to actionable takeaways by looking for broad patterns of success and failure
  • The trick when dealing with failure is arranging your financial life in a way that losses here and there won’t wipe you out

Chapter 3: never enough

  • If you risk something that is important to you for something that isn’t important to you, that doesn’t make any sense
    • There is no reason to risk what you have and need for something you don’t have and don’t need
  • The hardest financial skill is getting the goalpost to stop moving
    • If expectations rise with results, there is no logic with striving for more because you’ll feel the same after putting in more effort
  • Modern capitalism is great at 2 things: generating wealth and generating envy
  • Life isn’t any fun without a sense of enough
    • Happiness is just results minus expectations
    • Social comparison is the problem here 
  • Enough is not too little
    • Enough is realizing that the opposite, the insatiable appetite for more, will push you to the point of regret 
  • There are many things never worth risking no matter the potential gain

Chapter 4: confounding compounding

Chapter 5: Getting Wealthy vs. Staying Wealthy

  • There are 1 million ways to get wealthy. But there’s only one way to stay wealthy:
    • Some combination of frugality and paranoia
  • Getting money and keeping money are two different skills
    • Getting money requires taking risks, being optimistic, and putting yourself out there
    • Keeping money requires the opposite: humility, fear that what you’ve made can be taken away, frugality, and an acceptance that at least some of what you’ve made is attributable to luck
  • Longevity is what allows the power of compounding to occur
    • More than big returns, I want to be financially unbreakable
    • Plan on the plan not going according to plan
  • Room for error, aka margin of safety, is one of the most under appreciated forces in finances
    • It comes in many forms: a frugal budget, flexible thinking, and a loose timeline
      • Anything that lets you live happily with a range of outcomes
      • It’s different from being conservative, avoiding a certain level of risk
    • Margin of safety is raising the odds of success at a given level of risk by increasing your chances of survival
  • A barbelled personality: optimistic about the future but paranoid about what would prevent you from getting to the future is vital

Chapter 6: tails, you win

  • Long tails drive everything
    • Most of the wins come from a small amount of decisions
    • Most decisions will not matter and will lead to failure
  • Nobody makes good decisions all of the time

Chapter 7: freedom

  • Having a strong sense of controlling ones life is a more dependable predictor of positive feelings of well being than any of the objective conditions of life that we’ve considered
  • Money’s greatest intrinsic value is its ability to give you control over your time
    • Doing something you love on a schedule you can’t control can feel the same as doing something you hate
    • Psychologists call this reactants

Chapter 8: man in the car paradox

  • Most people want respect and admiration, and when they see your fancy car, they don’t admire you but rather the car
    • They envision themselves in it and desire to be admired
  • Getting the fancy things won’t bring you these things
    • Humility, kindness, and empathy will bring you more respect than horsepower ever will 

Chapter 9: wealth is what you don’t see

  • Wealth isn’t the expensive things you see, but rather the assets you don’t see that haven’t been converted yet into material things
    • The definition of wealth is to not spend the money you do have
  • Rich is current income
    • Wealth is hidden, income not spent
      • It is an option not yet taken to but something later
      • It’s value lies in offering you options, flexibility and growth to one day purchase more stuff than you could right now
  • Most people deep down want to be wealthy and have the freedom and flexibility. Financial assets not yet spent can give it to you
    • But it is so engrained that to have money is to spend money, that we don’t get to see the restraint it takes to actually be wealthy

Chapter 10: Save Money

  • One of the most powerful ways to increase your savings isn’t to raise your income, it’s to raise your humility
    • Savings is the gap between your income and ego
  • People with enduring personal finance success tend to not give a damn about what other people think about them
  • Savings gives you the flexibility and control over your time that is an unseen return on wealth
  • Competitive advantages tilt towards nuanced and soft skills like communication, empathy, and flexibility
    • You can wait for good opportunities. You’ll have a better chance at being able to learn a new skill when it’s necessary
    • You’ll feel less urgency to chase competitors, and have more leeway to find your passion and niche at your own pace, and think about life with a different set of assumptions

Chapter 11: reasonable > rational 

  • When managing money, aim to just be pretty reasonable, not coldly rational
    • Investments and financial strategies that feel right to you are more likely to keep you committed to them, and are therefore more effective than mathematically logical strategies

Chapter 12: surprise!

  • Experiences or what’s happen in the past is not a good indicator of what will happen in the future
  • The majority of what’s happened at any given moment in the global economy can be tied back to a handful of past events that were nearly impossible to predict

Reader’s note: This talk about surprises reminds me of the ideas brought up in the book Black Swan, how surprises by nature are unpredictable.

  • Surprises will move the needle the most and be the most impactful
    • They’re reminders that anything can happen
  • Recent history is more useful than older history in helping forecast the future because the conditions they use are more relevant and timely than compared to further in the past
  • The further back you study in history, the more general your takeaways should be as those tend to be more stable

Chapter 13: room for error

  • Blackjack card counters teach us that humility is important
    • They can play the odds, but they know that they can never be certain what will come up next
  • You have to have room for error and plan on things not going according to plan
  • Margin of safety aka room for error is the only effective way to safely navigate a world that is governed by odds not certainties
    • You have to take risk to get ahead but no risk that can wipe you out is ever worth taking
    • It’s like playing Russian roulette
  • One way to mitigate risks is to avoid single points of failure
    • There needs to be backups and redundancies

Chapter 14: you’ll change

  • An underpinning of psychology is that they are poor forecasters of their future selves
  • Avoid the extreme ends of financial planning

Chapter 15: nothings free

  • Market volatility is a fee, not a fine
    • Market returns are never free

Chapter 16: you & me

  • Bubbles do their damage when long-term investors playing one game take their investing cues from their short-term traders playing another

Chapter 17: the seduction of pessimism

  • Optimism is the belief that the odds of a good outcome are in your favor over-time even when there will be setbacks along the way
    • The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up and cause trouble is the foundation of optimism
  • Pessimism just sounds smarter and more plausible than optimism
  • Growth is driven by compounding which takes time
    • Destruction is driven by single points of failure and can happen in seconds, and loss of confidence which can happen in an instant

Chapter 18: when you’ll believe anything

  • Incentives are a powerful motivator, and we should always remember how they influence our financial goals and outlooks
  • There is no greater force in finance than room for error
    • The higher the stakes, the wider it should be
    • Everyone has an incomplete view of the world, but we form a complete marriage to fill in the gaps
  • Most people when confronted something they don’t understand don’t realize they don’t understand it because they’re able to come up with an explanation that makes sense based on their own unique perspective and experiences in the world, however limited those experiences are
    • We all want the complicated world we live in to make sense, so we tell ourselves stories to fill in the gaps of what are effectively blind spots
  • The illusion of control is more persuasive than the reality of uncertainty, so we cling to stories about outcomes being under our control

Chapter 19: all together now

  • Go out of your way to find humility when things are going right, and forgiveness and compassion when they go wrong because it’s never as good or as bad as it looks
    • The world is big and complex
    • Luck and risk are both real and hard to identify
    • Do so when judging yourself and others
  • Less ego, more wealth
    • Saving money is the gap between your ego and income
    • Wealth is what you don’t see
    • It’s created by suppressing what you could buy today to have more options in the future
  • Manage your money in a way that helps you sleep at night
  • Become okay with a lot of things going wrong
    • A small minority of things account for a majority of the outcomes
    • Always measure how you’re doing by your whole portfolio
  • Use money to gain control over your time, because not having control of your time is such a universal and powerful drag on happiness
  • Be nicer and less flashy
    • You’re more likely to get respect and admiration through kindness and humility
  • Save
    • You don’t need a specific reason to, and also you cannot predict what you might need it for in the future
  • Worship room for error
    • The gap between what could happen and what you need to happen in order to do well is what gives you endurance, and endurance is what makes compounding magic overtime

Chapter 20: Confessions

  • Independence means you only do the work you like with the people you like at the times you want for as long as you want
    • Achieving some level of independence is a matter of keeping your execrations in check and living bellow your means

Closing thoughts:

I loved this book. So many deep and practical insights about money and how to succeed in personal finance. Just like how the book mentioned in the beginning, it’s true that the two topics that affect everyone are health and money.

This book hits all of the right points on what it takes for most people to work towards financial independence and a life focused on important things instead of the ego. This is a book that anybody can follow along and significantly improve the way they manage money and money mindset.

Overall, highly recommend this book. It’s one of those rare books that actually changed the way I think, but also compelled me to share the insights I learned almost immediately with others.

One Takeaway / Putting into practice:

The biggest takeaway I got from this book is the insight I’ve already shared with several of my close friends because it was so impactful to me:

  • Never play Russian roulette

This point is reiterated several times in the book. What this means is that you should never take any risk or bet that you cannot afford to lose, no matter what the potential gain. By doing so, you improve your longevity and keeps you in the game for longer. This way gives compounding time to do it’s magic and build your wealth.


They key to financial success is adopting a healthy money mindset: focusing on longevity, utilizing margin of safety, keeping your ego in check, and managing your money in a way that feels right.

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Rating: 5 out of 5.


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