The Psychology of Money by Morgan Housel

Episode 2: Book Summary

The Psychology of Money, by Morgan Housel, provides a deep dive into human psychology with money serving merely as the frame of reference. The book is structured as 20 chapters with 1 principle (and typically 1 story) addressed in each chapter. Housel makes the content entertaining and digestible. Worth the read because this summary doesn’t adequately capture the storytelling prowess of the author. However, in the meantime, below are my notes.

My Takeaways

  • Everyone is playing a different game. Take the step to identify which game I want to play then stick to my strategy

  • Money's value as an enabler of freedom


  • Margin of safety is raising the odds of success by increasing my ability to tolerate a wider range of outcomes. It increases my likelihood of survival. This is different than conservatism, which implies taking no risk at all

  • Going for the long run (surviving) is the key to long-term returns. Burnout or betting the house (and losing) are both killers here

  • When making forecasts about how things will go, be certain that I'm not creating the range of possibilities based on what I “want” to happen. Accurate forecasting is not a failure of analysis... it’s a failure of imagination. The most influential events tend to be unpredicted, outlier events

  • Reframe certain costs as a "price of admission" vs "paying a fee." Particularly relevant as we brave a market downturn right now. Can I view this volatility as the "price of admission" for investing?

  • Wealth is what you don't see. All I know about a person driving a $100K car is that they have $100K less in their bank account (or $100K more debt) than they did before they bought the car

  • Stories are the most powerful force


  • Voltaire: “history doesn’t repeat itself, but man does”

Chapter 1: No One is Crazy

  • We have individually experienced .000001% of financial events, yet our individual experiences shape 80% of our individual view on money

  • Our view on money is almost entirely dictated by our personal experiences

    • The decade you grew up in dictates your views on inflation, stock market, interest rates

      • JFK admitted he had no concept of Great Depression because his family had more wealth than anyone during that period

      • One can read about the 2008 crisis, but they can’t simulate the feeling of coming home and looking your kids in the eyes and telling them your house is getting foreclosed on

      • Wealthy person can’t fathom the value of the dream, however fleeting, afforded to the poor person buying the lotto ticket

      • Retirement accounts were created in the ’70s. Hedge funds took off in the last 25 years. We’re all newbies at this

Chapter 2: Luck and Risk

  • Nothing is as good or as bad as it seems

  • Luck and risk are 2 sides of the same coin. So be careful who you praise and admire. Be careful who you look down on. Be careful what you attribute to superior decision making vs a lucky break

  • Bill Gates example

    • Luck - Gates attended Lakeside High School. 1 in a million high school students had access to a computer. Lakeside had them.

    • Risk - Gates's best friend, who was equally smart and would have been MSFT co-founder, died in a mountaineering accident in high school. 1 in a million chance of that happening

  • What’s the difference between inspiringly bold and foolishly reckless?

    • We idolize Vanderbilt because he had the vision to ignore current NY law. Yet we criticize Enron for breaking the law. Both risk-takers. 2 very different outcomes

    • Be careful about studying extreme examples. Studying success often convinces smart people that they’re invincible and that they can’t lose. Similarly if all one studies is failure then one will overlook the role that calculated risk had in that outcome

Chapter 3: Never Enough

  • Buffett: “Never risk what you have and need for what you don’t have and don’t need”

  • The best way to achieve success financially is to stop moving the goalposts of "what's enough"

  • Social comparison will kill you. There will always be someone richer

  • Don’t wait to find your breaking point to find out what is enough

    • The only way to know how much food you can eat is to gorge yourself to the point of being sick. But we intuitively know that the cost of vomiting is not worth an extra bite of food. This lesson is harder learned when it comes to money

Chapter 4: Confounding Compounding

  • Shut up and wait.

  • Buffett is rich because he started investing in his teenage years. Then, the vast majority of his wealth was acquired after he was 65.

  • We think that superior returns is how we get rich. But it’s actually “pretty good returns” over a very long period of time. The key is time

Chapter 5: Getting Wealthy vs Staying Wealthy

  • Some combination of frugality and paranoia

  • The key is survival - the ability to go for the long run

    • 1 year of growth doesn’t lead to wild success. 50 years of growth does

  • Michael Moritz (Sequoia): “We were always scared of going out of business. We didn’t rest on our laurels.”

  • Past success does not guarantee future returns

  • Burning out means that you aren’t playing for the long run. You’re invoking your own death

  • Buffett: “Munger and I always knew we would get wealthy. So we weren’t in a hurry. Rick (other co-founder) was in a rush so he over-levered. Then when the market took a downturn, he got margin called. He had to sell his Berkshire stock back to me.”

  • Margin of safety is raising the odds of success by increasing your ability to tolerate a wide range of outcomes. It increases your likelihood of survival.

    • Conservatism is avoiding a certain level of risk altogether

    • The higher your margin of safety the smaller your “edge” needs to be to have a favorable outcome

  • You need short-term paranoia to keep you alive long enough to exploit long-term optimism

Chapter 6: Tails, You Win

  • Tail outcomes drive the returns

  • Power law

    • Example of VC or art portfolio strategy of investing in a lot of assets, then relying on the returns of a couple

  • Keeping your cool during downturns

    • Napoleon: "The man who can do the average thing when everyone else around him is losing his mind."

    • The job of an airplane pilot is hours and hours of boredom punctuated by a few moments of sheer terror. Being a good investor means keeping your cool during these moments of terror.

  • Failure as a part of the game

    • Airplane pilot you have to be right 100% of the time, chef you have to be pretty good most of the time, investing you can be right only half the time and can still succeed

    • Soros: “You can be wrong half the time and still make a fortune. What matters is how much money you make when you’re right and how much money you lose when you’re wrong.“

    • Bezos on the Amazon Fire phone: "If you think this was a big failure, we're working on even bigger and more catastrophic failures right now"

      • The success of tail outcomes like AWS offsets the failures like the Fire phone

Chapter 7: Freedom

  • Highest form of wealth is waking up and being able to do whatever you want that day

  • Money’s greatest intrinsic value is its ability to give you control over your time

    • To obtain, bit by bit, a level of independence and autonomy that comes from unspent assets that give you greater control over what you can do and when you can do it

    • Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with

  • Angus Campbell’s book Sense of Well-Being in America:

    • "Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of well-being than any of the objective conditions of life we have considered - salary, size of house, prestige of job. Controlling what you want, when you want, with the people you want to is the broadest lifestyle variable that makes people happy."

  • Reactants

    • Jonah Berger (UPenn): "People like to feel like they're in control. In the driver's seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say ‘no’ or choose to do something else, even when they might have originally been happy to go along."

    • Aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return

Chapter 8: Man in the Car Paradox

  • We buy things to get the respect and admiration of other people, but I’m not gawking (or even looking) at the man in the car. I'm gawking at the car itself and imagining myself in it

  • If what you really want is respect and admiration, then ask yourself, “is the flashy new car the best way to get it?”

    • And more importantly, will you be getting that respect from people whose respect you care about?

Chapter 9: Wealth is What You Don’t See

  • If someone drives a $100K car, then the only data point that you have on them is that they have $100K less than what they had before they bought the car (or have $100K more debt)

  • Wealth is the financial assets that are NOT converted into material things

    • Rihanna's financial advisor after going bankrupt: "Did I really have to explain to her 'when you spend money on things, you end up with the things and not the money.’"

    • People say they want to be a millionaire, but what they really want is to spend $1M. That is the exact opposite of being a millionaire.

  • Wealth is invisible so it’s incredibly hard to imitate

    • Wealth is what's saved in the bank account or investments in the brokerage account

    • "Rich" is visible. It's the flashy car or nice house

    • The world is full of modest people who are actually wealthy and rich people who are living on the razor's edge of insolvency

    • Wealth is the income not spent. It’s the option to spend on something in the future when you see fit

Chapter 10: Save Money

  • Past a certain level of income, what you "need" sits just below the level of your ego

    • Some investors grind out an extra 30 hours per week so they can generate an incremental 0.01% of returns. Yet there's likely 2-3% of bloat in their lifestyle that could be decreased with much less effort

  • Savings rate is the most important variable for building wealth

    • Example of energy crisis in the United States - we didn’t rely on finding more energy to solve the crisis, we relied on getting more efficient with the energy that we already had

    • Savings = income - expenses

    • Savings = income - ego

      • Best way to increase savings rate is to increase your humility

  • Savings gives you optionality... and optionality is key

Chapter 11: Reasonable > Rational

  • Don’t rely on being coldly rational. Reasonable is more realistic and gives you a better chance of sticking to it for the long run. Sticking to a long-term strategy is the most important thing for future success

    • Whatever keeps you in the game has a quantifiable advantage

    • So if “loving your investments” gets you to hold on to them for the long run, then use that "irrationality" to your advantage

Chapter 12: Surprise!

  • Historians are not prophets. Past experience might actually cloud your ability to predict the future because you’re overconfident about your experience, yet you’re anchored to the way things went in the past

    • Just because you experienced rate hikes in the past does not mean that each asset class will respond in a similar way this time around

  • Outlier events drive most of the most meaningful change in the world (and returns in finance)

    • Great Depression, 9/11, 2008 housing crisis

    • Of all the people born in the 1900s, a few had a disproportionate impact - Hitler, Stalin, MLK, etc.

  • Accurate forecasting is not a failure of analysis... it’s a failure of imagination

  • Predicting based on past events doesn't account for the structural changes that have happened since then

  • Surprises are the biggest needle movers in the financial markets

Chapter 13: Room for Error

  • Blackjack card counters don’t bet the house in a single bet even if the odds heavily favor them, because they recognize there is still a probability that they’re wrong. They need to keep enough chips to continue to play the game, even as the house goes on runs

    • Realize their strategy depends on probabilities, not certainties

  • “The purpose of the margin of safety is to render the forecast unnecessary.”

    • Gives you the ability to tolerate a wider range of outcomes

    • Gates: run the business so that we have 1 year of payroll

    • Buffett: I will not sacrifice even 1 night of sleeplessness for extra profit

  • You need to take risks to make a return. But no risk is worth it if it could wipe you out

Chapter 14: You’ll Change

  • Accept the reality that you change your mind

    • So make decisions that will minimize future regret

  • Going to one of the extreme ends of the spectrum creates risk. Risk can cause future regret

    • 1 extreme: working long hours to make a lot of money and retire early

    • Another extreme: working minimum wage job in order to indulge in life's pleasures in your 20s, so you have no savings

    • Balance on the spectrum gives you endurance for the long run

    • Compounding doesn't work unless you do it for the long run. However, we tend to not want to do the same thing for a lifetime

    • Regrets are painful when you have to abandon a previous plan and run in the opposite direction 2x as fast in order to catch up

    • "Endurance is key. When you consider our tendency to change who we are over time, balance at every point in your life becomes a strategy to avoid future regret and encourage endurance"

      • Moderate annual savings

      • Moderate free time

      • No more than a moderate commute

      • Moderate time with family

      • Having these increases odds that you can stick to a plan for the long run

  • "We have an illusion that our personal history has just come to an end. And that we have just recently become the person who we were always meant to be and will be for the rest of our lives."

  • "I HAVE NO SUNK COSTS" - Daniel Kahneman

    • Co-author said that he had a unique ability to "detonate what we had just done."

    • His ability to completely scrap a draft that he’s been working on for the past days or weeks. He brings in brand-new research, information, and writing

    • Accept the reality that you have changed and then move on

    • Only carry forward the best stuff

Chapter 15: Nothing's Free

  • Say you want to buy a $30K car...

    • Option 1: Buy a new car for $30K

    • Option 2: Buy used car for less than $30K

    • Option 3: Steal the car

  • As it relates to stocks:

    • Option 1: Buying a stock and accepting its volatility in the short term

      • Withstanding the frequent taunts by the market that come in the form of volatility

    • Option 2: Rotating into lower risk assets the promise lower returns

      • Sacrificing large returns for stability

    • Option 3: Trading in and out of the stock while trying to time the market

      • Trying to get the gains without paying the fee

  • Shift your mindset from “paying a fine” → “paying a fee”

    • We think about paying fines when we've done something wrong (traffic ticket)

    • Fees are just the price of admission

    • Nobody is upset about paying the fee to get into Disneyland. It might rain and you might “lose” in this case but you understand that’s the price of admission

    • View volatility as the price of admission

    • Killed ideas or underperforming investments are the price of admission for playing the game. They aren't fines because you've done something “wrong”

Chapter 16: You & Me

  • Bubbles are so controversial because nobody wants to feel like they’re holding an overpriced asset

    • It’s easy to point to greed but it’s often much more complex

  • Momentum is key

    • It’s silly to assume that there’s one "rational price" for a stock when multiple investors with different time horizons are all buying into the same stock at the same price in the same market

    • Short-term investors are looking to make a return in a different way than long-term investors

      • Thus their models are completely different

      • Bubbles can easily happen when momentum takes hold and the balance of stockholders shifts from long-term holders to short-term holders

  • Recognize that you and all other investors are playing different games

    • CNBC says to BUY

      • Elderly woman that's retired has different financial goals than hedge fund manager trying to make their quarter

  • Take the step to identify what game you’re playing, then stick to your strategy

    • Applies to consumer spending as well

      • Don’t be persuaded by the way others choose to spend their money. They're likely playing a different game

Chapter 17: The Seduction of Pessimism

  • Pessimism sounds smarter and more sage than optimism

  • Evolution teaches us to take threats more seriously than opportunities

    • Asymmetric response to losing vs winning

  • Pessimism feels easier to explain

    • Easier to explain why stock market is falling (“Fed screwed up”) vs rising (“that’s what it’s supposed to do”)

    • Harder to envision or diligence the upside

  • Pessimists tend to extrapolate current trends without accounting for how markets will adapt

    • Extremely good or extremely bad circumstances rarely persist because supply & demand adapt in hard-to-predict ways

    • Oil crisis either shifts the demand curve (higher prices) or finds ways to increase supply (horizontal drilling, fracking)

  • Problems necessitate innovation

  • Progress is seen slowly over time, but setbacks are often seen immediately

Chapter 18: When You'll Believe Anything

  • When stakes are high and info is limited, you’ll believe almost anything

  • When you want something to be true, you’ll find ways to justify it as the truth

  • Stories are, by far, the most powerful force in the economy

    • Difference between 2007 and 2009 was not that the economy shifted, it was that we changed the story we told ourselves about the economy ("housing prices only go up")

  • Making forecasts

    • When making forecasts about how things will go, be certain that you’re not creating the range of possibilities based on what you “want” to happen

    • We have a desire to make forecasts, even though we established earlier that some of the biggest outcomes are caused by completely unforeseen events

    • It can’t be overstated: there is no greater force in finance than room for error, and the higher the stakes, the wider it should be

  • Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps

    • Wanting to believe that we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control

  • Interviewer asked startup founders what % of their future success would be attributed to what was in their control vs out of their control... no founder gave an answer less than 80% "in their control"

Chapter 19: All Together Now

  • Summary of all previous chapters

Chapter 20: Confessions

  • How Mr. Housel manages his money

  • When studying how doctors choose to die themselves, they very often go with less treatment, which is counter to what they recommend for patients

    • This shows how it’s important to take into account the patient’s preferences and situation

  • “Independence has always been my goal”

    • Making moves on my own terms

      • Goal is not to retire. Goal is to only work on what I want with the people I want

    • Independence driven by savings rate

      • Best way to increase savings rate is to keep lifestyle expectations from running away

    • Nassim Taleb: "True success is exiting some rat race to modulate one’s activities for peace of mind."

  • 20% of assets (outside of home value) held in cash

  • Save for unplanned expenses

    • Don’t pretend to know what it is

    • Just save for this unplanned expense, because odds are we’ll face one someday

    • Don’t want to have to liquidate stocks or assets to cover this unplanned expense

  • Invest in low cost index funds

    • Belief that investment returns are not correlated to investment effort

  • Strategy summed up as:

    • High savings rate

    • Patience

    • Optimism for future growth of the total economy

  • Optimize for sleeping well at night

Postscript: A Brief History of Why the U.S. Consumer Thinks the Way They Do

  • History of US economy and US consumer since the 1900s

  • Expectations shift slower than reality

  • During the period between the end of WW2 and the 1970s, Americans got used to living like their neighbors. Despite one’s position in the economic hierarchy, one’s experience culturally was not that different. The lives of the 95th percentile were fathomable by those in the 50th percentile

  • Since then, wage increases for the middle class have remained flat, or even declined for some groups, while the top percentiles have captured a disproportionate amount of the growth driven by the broader economy

  • This misled middle class America to desire and strive for things that their wealthy neighbors had, but without the means to do so. So they took on more debt to fund this lifestyle

  • When they couldn’t service this debt, the economy collapsed. The result was 2008

  • The attempts to deal with the collapse (QE and corporate bailouts) disproportionately favored the top percentiles, driving the wealth gap even wider

  • Extreme ends of politics in the last few years are a response to people wanting to get off the ride (whatever this ride is). People haven’t reset expectations, so it’s hard to accept their new reality

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