Summary of Psychology of Money by Morgan Housel

1. The Psychology of Money
The psychology of money is a book written by Morgan Housel that teaches us
doing well with money has a little to do with how smart we are and a lot to do
with how we behave. And behavior is hard to teach, even to really smart people.
It tries to explained why we should have better relationship with money for
making better financial decisions. Morgen Housel uses interesting stories to
illustrate our unlogical behavior with money. Financial success is not a hard
science. It’s a soft skill, where how we behave is more important than what we
know. The aim of this book is to use short stories to convince you that soft skills
are more important than the technical side of money. Money is everywhere, it
affects all of us, and confuses most of us. Everyone thinks about it a little
differently. It offers lessons on things that apply to many areas of life, like risk,
confidence, and happiness.
We are challenged by the fact that no amount of learning or open-mindedness can
truly restore a sense of fear and uncertainty. People from different generations,
raised by different parents who earned different incomes and held different
values, in different parts of the world, born into different economies, experiencing
different job markets with different incentives and different degrees of luck, learn
very different lessons. Everyone has their own unique experience with how the
world works. And what we have experienced is more compelling than what we
learn second hand. Morgan Housel states that a person’s personal experiences
with money make up 0.00000001% of what’s happened in the world but those
experiences make up around 80% of what we think of the world.
Luck and risk are siblings. They are both the reality that every outcome in life is
guided by forces other than individual effort. Nothing is good or as bad as it
seems. It is easy to convince ourself that our financial outcomes are determined
entirely by the quality of our decisions and actions, but that is not always the case.
Sometimes we can make good decisions that lead to poor financial outcomes.
And we can make bad decisions that lead to good financial outcomes. We have
to account for the role of luck and risk.
Morgan Housel describe how it tends to be rich people who do crazy things with
money. The thinking is that as soon as they get rich, their goals change. They
want more and more and do it in a way that puts everything they have already
earned at risk. It is crucial for us to recognize when we have enough and to start

2. playing it safe. The idea of having “enough” might look like conservatism,
leaving opportunity and potential on the table.
Lessons from one field can often teach us something important about unrelated
fields. It is difficult for the mind to comprehend the power of compounding. The
key to good investing is to give it time. As an investor, we don’t need incredible
returns, we need to have reasonable returns over a long period of time. This is
how we get rich.
Good investing is not about making good decisions. It’s about consistently not
screwing up. Housel suggests that the we should focus on getting our finances
into shape so that we cannot be broken rather than focusing on huge returns. Many
of us chase big returns only to lose everything. Instead, patience and earning
average returns over longer periods of time builds generational wealth.
We can be wrong half the time and still make a fortune. Anything that is huge,
profitable, famous, or influential is the result of a tail event—an outlying one-in-
thousands or millions event. And most of our attention goes to things that are
huge, profitable, famous, or influential. When most of what we pay attention to
is the result of a tail, it’s easy to underestimate how rare and powerful they are.
So instead of trying to recreate what Elon Musk, Reed Hastings or Jeff Bezos do,
a clear investor is someone who does the basics right. They follow the average
trends by making sound, sensible decisions that help them to achieve their own
realistic goals rather than trying to recreate a miracle.
The highest form of wealth is the ability to wake up and say, ‘I can do whatever
I want today’. People want to become wealthier to increase their happiness. But
happiness is a complicated subject because we’re all different. Money’s greatest
value then is its ability to give you control of your time. Housel says that
controlling your time is the highest dividend that money can pay.
Another lesson is the man in the car paradox. When you see a guy in a Ferrari,
you don’t think that you want to be friends with that guy, you think that you want
to be that guy. Many people build wealth because they think it will make people
like them but all it will do is make people want to be like them which is a very
different thing.

3. Wealth is something what we don’t see. Spending money to show people how
much money we have is the fastest way to have less money. Here Morgan Housel
advises that we should not judge a person’s wealth on what we see and in what
possession people have. Housel states that true wealth is having the option to
purchase more stuff than you can right now.
Saving money is one of the best things we can do is remove your ego from the
equation. Don’t spend money on unnecessary things
Savings = Income – Ego
Having more savings in the bank and lower costs because we have removed the
ego from our spending may mean that we can have the flexibility to work fewer
hours or for a lower salary for a job we are more interested in or to invest in an
opportunity you may not have been otherwise able to.
People should be reasonable rather than always being rational. Do not aim to be
rational when making financial decisions. Aim too just be pretty reasonable.
Reasonable is more realistic, and we have a better chance of sticking with it for
the long run. Being reasonable rather than always rational leads to better
investment decisions.
History is mostly the study of surprising events. But it is often used by investors
and economists as an unassailable guide to the future. “Things that have never
happened before happen all the time.” Experiencing specific events does not
necessarily qualify us to know what will happen next. In fact, it rarely does
because experience leads to overconfidence more than forecasting ability.
History is littered with good ideas taken too far, which are indistinguishable from
bad ideas. The wisdom in having room for error is acknowledging that
uncertainty, randomness, and chance “unknowns” are an ever-present part of life.
The only way to deal with them is by increasing the gap between what you think
will happen and what can happen while still leaving you capable of fighting
another day. People underestimate the need for room for error in almost
everything they do that involves money.

4. Housel states that you’ll change over time. So, make sensible goals because in 5
or 10 years you won’t necessarily want the same things as you want now.
Imagining a goal is easy and fun. Imagining a goal in the context of the realistic
life stresses that grow with competitive pursuits is something entirely different.”
When we’re making long-term decisions, then, remember to avoid the extreme
ends of financial planning and accept the reality of changing our mind.
Everything has a price and just because we can’t see it, it doesn’t mean we won’t
end up paying it. The market goes up and down. Sometimes we will lose money.
If we are able to frame these dips as fees for playing the game rather than as losses
it will help us stay the course. And as Housel has covered, staying the course is
how we make the big money in the long run.
We should be aware of who we are taking financial advice from. It’s very hard to
apply the advice of someone who has different amounts of money or different
goals. It won’t work in the end. Instead, look at the average and do what works
for people in your situation in general. The most important thing is to do our best
to find out what game we are playing.
Optimism is the best bet for most people because the world tends to get better for
most people most of the time. But pessimism holds a special place in our hearts.
Pessimism isn’t just more common than optimism. It also sounds smarter. It’s
intellectually captivating, and it’s paid more attention than optimism, which is
often viewed as being oblivious to risk. 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.
The last lesson is appealing fiction, and why stories are more powerful than
statistics. It’s easy to get caught up in a good story but we have to be careful
because some stories can be too good to be true. Appealing fictions have a big
impact on how we think about money particularly investments and the economy.
The book is divided into different chapters with a lesson. The Psychology of
Money aims to examine the weaknesses in our mental attitudes with money.
Housel lays out his own principles of how he believes we should think of and
handle our finances. If we want to do better as an investor, the single most

5. powerful thing we can do is increase our time horizon. Time is the most powerful
force in investing. It makes little things grow big and big mistakes fade away. It
can’t neutralize luck and risk, but it pushes results closer towards what people
deserve.