The Psychology of Money (by Morgan Housel)

Succeeding financially isn't just about knowing things; it's also about how you act and behave. 

Teaching good financial habits is tough, even for really smart people. 

Schools usually don't teach about making money through investments, managing personal finances, or making smart financial choices. 

But as you go through life, you'll face situations where your money decisions, whether good or bad, have long-term effects. 

Making more money often confirms your choices, while the opposite can lead to problems. 

To explore this idea further, renowned author Morgan Housel wrote a book called "The Psychology of Money." 

In it, he shares stories that shed light on people's attitudes toward money and offers advice on understanding and improving your financial mindset. 

Let's dive into the valuable lessons from this important book.

Lesson #1: Minimizing errors and maximizing success.

Ensuring that your choices are the correct ones is essential. 

A misstep automatically results in an incorrect decision. 

While your personal financial experiences greatly shape your decision-making, it's important to understand that these experiences represent only a tiny fraction (0.0001%) of global financial dynamics. 

Although this percentage might seem significant in your individual context, it's minor compared to the broader population. 

People justify their financial decisions based on the information available to them at the time and their understanding of how the world works. 

It's important to recognize that everyone's perspective on money varies, influenced by factors such as:

• upbringing
• cultural background
• values
• location

As emphasized in Housel's book, adopting a humble attitude, anticipating unforeseen events, and planning accordingly are crucial. 

Rather than just preparing for expected situations, it's wise to be ready for potential deviations from the norm.

Lesson #2: Luck and risk are inseparable companions.

Life's outcomes rarely fall strictly into positive or negative categories; they often lie somewhere in between. 

Luck and risk are closely intertwined, playing significant roles in shaping our lives. 

These two concepts are so closely linked that acknowledging one necessitates recognizing the other. 

Despite our uniqueness, we must acknowledge that our actions alone cannot dictate every outcome, given the vast diversity of humanity, which comprises over seven billion individuals. 

Success often leads us to attribute our achievements solely to our skills and knowledge, while failure tends to be attributed to sheer bad luck. 

However, the reality lies in the balance between luck and skill, with some individuals experiencing more favorable outcomes due to luck alone. 

Housel advises against fixating on individual stories and instead encourages focusing on broader trends and patterns. 

While taking risks is crucial for long-term success, it's important to avoid overly reckless behavior that could result in significant losses, potentially jeopardizing future opportunities for success.

Lesson #3: Avoiding complacency is key. 

Discovering contentment in life brings genuine satisfaction, but continually chasing unattainable desires leads to disappointment. 

The most critical financial skill involves knowing when to cease the pursuit of more.

In Morgan Housel's book, he recounts a story about a billionaire hedge fund manager hosting a party attended by Kurt Vonnegut and Josh Heller, the author of Catch-22. 

Despite the host's immense wealth, Heller observed that he possessed something the host lacked: contentment. 

While not everyone may achieve such wealth, many will reach a point where their needs are met. 

Recognizing this and finding contentment in one's circumstances is essential. 

Constantly craving more leads to perpetual dissatisfaction. 

Furthermore, an unending pursuit of greater wealth, power, and status can dangerously inflate one's ambitions, eclipsing any sense of fulfillment.

Lesson #4: First, acquire wealth, then preserve it. 

It's essential to differentiate between becoming affluent and ensuring enduring financial security. 

While the former implies short-term prosperity, the latter signifies sustained wealth over a lifetime. 

Successful investing isn't solely about making flawless decisions but rather consistently avoiding significant errors. 

Extraordinary outcomes can stem from modest beginnings, defying conventional expectations. 

There are various avenues to attaining wealth, but safeguarding riches demands prudence and careful management, echoing Warren Buffett's advice. 

The fundamental principle of wealth preservation is to prevent erosion of capital. 

Many individuals accumulate fortunes only to squander them later on. 

Preserving wealth entails more than mere accumulation; it necessitates strategic investment to yield returns. 

Despite achieving financial success, it's crucial to acknowledge the role of luck and recognize that past accomplishments don't guarantee future prosperity. 

Sustaining wealth requires a long-term commitment and patience to accumulate substantial returns gradually. 

Warren Buffett's enduring success underscores the significance of perseverance in wealth accumulation. 

While quick gains may be enticing, the prudent approach involves maintaining long-term investments to steadily amass wealth over time and secure generational prosperity. 

Preserving wealth poses a nuanced challenge compared to initial acquisition.

Lesson #5: Freedom. 

Having the ability to do what you want, when you want, with whom you want, for as long as you want, is invaluable. 

It's the best part of having money. 

Being wealthy means having the power to wake up and say, "Today, I can do whatever I want," without any limitations. 

People pursue wealth because they believe it leads to happiness. 

While happiness means different things to different people, one thing that contributes to happiness is having control over your life. 

According to Angus Campbell's book "The Sense of Well-being in America," feeling in control of your own life is a better predictor of happiness than any other life circumstances. 

The greatest thing money can give you is the ability to control your time. 

Morgan Housel shared a story about his internship at an investment bank. 

He loved the work but realized that doing something you love in a way that you can't control can feel just as bad as doing something you hate.

Lesson #6: The car ownership paradox. 

Have you ever seen someone driving a luxurious car and thought, "wow, that person must be really cool"? 

It's a rare sentiment to express or witness. 

More often, you find yourself imagining what it would be like to be behind the wheel of that car and how others would perceive you.

This paradox highlights a common desire: 

people often seek wealth to garner admiration and approval from others. 

However, the reality is that those you wish to impress are more likely to use your wealth as a benchmark for their own social status rather than genuinely admiring you. 

Morgan Housel illustrated this concept to his newborn son, and now to you, by explaining that the desire for expensive possessions like fancy watches, luxury cars, or extravagant houses is rooted in the quest for respect and admiration from others. 

However, the lesson to be learned is not to forsake the pursuit of wealth or material possessions altogether. 

While they have their merits, it's crucial to recognize that they alone do not command respect and admiration. 

True admiration stems from qualities like: 

• humility
• kindness
• empathy

Lesson #7: Prioritize saving and avoid unnecessary expenses. 

Using spending as a means to showcase your wealth is a surefire way to diminish your financial resources. 

Our perception of wealth is often shaped by what we observe externally, as we lack visibility into individuals' actual financial accounts. 

People generally fall into three categories: 

• those who actively save
• those who believe they can save
• those who feel compelled to save 

Contrary to popular belief, accumulating wealth is less about investment returns and more about the amount you save. 

While investment returns have the potential to enhance your wealth, the uncertainty surrounding the longevity of investment strategies and market fluctuations makes them unreliable. 

In contrast, personal savings and prudent spending habits are within your sphere of control and are guaranteed to yield results. 

Relying solely on the expectation of higher income or substantial investment returns can lead to pessimism in the long run. 

Wealth is essentially the surplus accumulated after deducting expenses from income. 

Since wealth accumulation is feasible even with a modest income, whereas it's impossible without a substantial savings rate, it's evident that savings take precedence over income when it comes to building wealth.

Lesson #8: Be prepared for the unexpected. 

Surprises teach us that the world is unpredictable. 

While past surprises offer insights, they shouldn't dictate future expectations. 

Instead, they serve as reminders that while we may have an idea of potential outcomes, we can't predict them with certainty. 

Relying too heavily on past experiences can breed overconfidence rather than prudent planning. 

The narratives surrounding money play a significant role in shaping our attitudes and preferences towards goods and services. 

These narratives are transient and evolve over time, influenced by cultural shifts and generational changes.

Lesson #9: Allow for mistakes. 

Every plan should include a crucial element: room for error. 

The lesson here is to recognize the presence of uncertainty, randomness, and unforeseen circumstances. 

The best approach to handle these variables is to widen the gap between your expectations and potential outcomes. 

Morgan Housel encapsulates Benjamin Graham's idea of a margin of safety, which aims to make precise forecasting unnecessary. 

Given the challenges of accurate prediction, creating space for error is the most practical strategy for navigating a world filled with uncertainties and probabilities. 

The limitations of forecasting are akin to those faced by card counters, who cannot predict the exact location of a card in a shuffled deck. 

Similarly, attempting to predict the precise timing of one's retirement in business is fraught with uncertainty.

Lesson #10: Everything comes at a cost. 

Every action or decision has consequences, whether they are explicitly stated or not. 

Understanding the true cost of things, even those without a visible price tag, is crucial. 

Many aspects of life and finance are multifaceted and require careful consideration of their true costs. 

While some challenges may seem straightforward in theory, they often reveal their complexity in practice. 

Success in various endeavors, including investing, also entails costs, albeit not in traditional currency. 

Factors such as fear, doubt, volatility, and regret often accompany the journey to success and must be acknowledged and managed effectively.

"The Psychology of Money" is a highly acclaimed book that lives up to its reputation. 

I recommend reading the original text, as I may not cover all its aspects in this article. 

What's remarkable is that the book contains minimal tactical investment guidance but is rich in insights on developing wealth-building soft skills. 

How do you intend to apply these lessons? 

You can help support the channel by buying the book with the link here at no additional cost to you. 

Cheers!

- Ivan