The Psychology of Money Review
Timeless lessons on wealth, greed, and happiness 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.
How to manage money, invest it, and make business decisions are typically considered to involve a lot of mathematical calculations, where data and formulae 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 unique view of the world, ego, pride, marketing, and odd incentives are scrambled together.
In the psychology of money, the author shares 19 short stories exploring the strange ways people think about money and teaches you how to make a better sense of one of life’s most important matters.
The Psychology of Money has been widely recommended to me, both by the podcasts I follow as well as friends who are interested in investing. This is not a book about finance. Rather, it is a book containing observations about our relationship with money. With “psychology” in the title, I was expecting something more Kahneman-esque, with a focus on behavioural biases and how these lead to different investor performances. Instead, the book presents a more narrative-based discussion of various topics – perhaps “The Psychoanalysis of Money” might be a more apt title. The book is very quotable, but one gets the impression that it has been written to generate these quotes, instead of being a cohesive, flowing read.
All these negatives aside, The Psychology of Money is a short, gentle book that contains valuable lessons about personal finance. I don’t agree with all of Housel’s views and I think that people who have read other books about behavioural finance will find this book to be rather basic, but for most people it is worth a read. In any case, the chapters are about 5-10 minutes long and can be read independently of each other, so there isn’t much downside.
Some of my main takeaways:
- Happiness is determined by how much control you have over your free time; money (to an extent) provides this.
- Saving and compounding over long periods of time is the most reliable way to gain wealth and stay wealthy.
- Having a high savings rate is mostly determined by whether you can avoid “lifestyle creep” as you start to earn more.
- Cash is invaluable because of the optionality it gives you – whether that is the option to experience something new (e.g a holiday), the option to quit a job you don’t like, or the option to buy a major dip in the stock market. Saying that it returns 0% a year is disingenuous.
- The further back you look in history, the more general your takeaways should be.
- When making decisions, keep in mind that your current preferences may change.
- One should be risk-seeking in general but averse to the types of risks that can lead to ruin.
The Psychology of Money with Morgan Housel
About the Author
Morgan Housel is a partner at Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal.
Welcome to the new year! As you start the year fresh, why not test your knowledge and try a quiz on New Year? Happy quizzing!
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Sandhya Dinesh –
Good must read