The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
by Morgan Housel
The Psychology of Money by Morgan Housel is a quick read about how behaviors towards money are more important than most combinations of intelligence and luck when it comes to amassing wealth or losing it.
Housel’s thesis is that ‘financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.’
Arguing to support this point he gives a small comparison. Given that health and wealth are important to everyone, how can we have made such advancements in the medical field yet find ourselves unchanged in the domain of wealth creation?
Good question.
If medicine benefits from science, finance clearly doesn’t. Why is that? Again behavior and psychology are at the root of the problem. Where we have gained enormous know-how in medicine, our psychology, and thus our behaviors toward money have remained the same.
The book was grown out of Housel’s attempts to write about the 2008 financial crisis and sprouts from an earlier report of the same name.
Housel gives 20 short chapters of what he considers to be the most important features of the psychology of money. The chapters are anecdote and example heavy, both with behaviors to emulate and those to avoid.
Some of the most notable lessons come early.
The first is that your success is based on luck.
Yes, maybe it was wise to put money aside and invest in x or y upcoming technology or stock. But if you start seeing yourself as a gifted investor and abandon the behavior of humility it is just a matter of time before you will lose much of what you’ve gained.
This is hard to remember in a bull market I will admit.
It is frugality that gets you wealthy, but it is paranoia that keeps you wealthy.
In short, cover your bases. Build up an emergency fund. Set money aside. Dollar-cost average. Take profits.
The second notable lesson is to know what enough is.
This is great advice no matter what the field but it is particularly important in the world of finance where the default behavior is to keep chasing profits.
Besides Housel’s thesis and the few chapters that resonated with me personally, the Psychology of Money is just another finance book. It focuses on the basics because that is what is most important. Its chief merit is that it is short and easy to read. Many of the anecdotes Housel uses I’ve seen before.
The Psychology of Money is currently celebrated in the cryptoverse and in corners of twitter dedicated to finance but I don’t think the book necessarily deserves so much praise.
It is particularly for those who are just starting with investing and those who want to pass an easy afternoon with a book in their lap. For the more war-hardened investor, this book can be passed up without fear.
Did you read the Psychology of Money? What are your thoughts?