The Psychology of Money

When it comes to money or financial matters, no formal education has ever covered it. Even in families, people are never taught how to manage money, invest and make financial decisions. Till now, I believe only Rich Dad, Poor Dad book has been that successful that teaches us about financial education. This book from Housel is going to be Rich Dad Poor Dad for the current and coming generations.

🚀The Book in 3 Sentences

  1. The main premise of the book is that Financial Success is not a hard science but a soft skill where how you behave is more important than what you know.
  2. The book covers many ways people think about money and teaches you how to make better decisions wrt money.
  3. It also covers many aspects of human psychology when it comes to money.


1. No One’s Crazy

Everyone has their own unique experience with how the world works. The world view about how money works that vary wildly from person to person. What seems crazy to you might make sense to me. Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.

Every financial decision a person makes sense to them at that moment and checks the boxes they need to check. They tell themselves a story about what they’re doing and why they’re doing it, and that story has been shaped by their own unique experience.

We all do crazy stuff with money because we are all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy – we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

2. Luck & Risk

Nothing is as good or as bad as it seems.

Luck and Risk are siblings. Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happened because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: you are one person in a game with seven billion other people and infinite moving parts.

Risk and Luck are doppelgangers. This is not an easy problem to solve. The difficulty in identifying what is luck, what is a skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money.

Two things can point you in a better direction.

  1. Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. Realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.
  2. Focus less on specific individuals and case studies and more on broad patterns. Studying a specific person can be dangerous because we tend to study extreme examples. You will get closer to actionable takeaways by looking for broad patterns of success and failure.

3. Never Enough

When it comes to money, there is nothing called ‘enough’

To make money you didn’t have and didn’t need, don’t risk with something that you did have and did need. It’s just foolish. It doesn’t make sense if you risk something that is unimportant to you with something that is important to you.

Remember a few things:

  1. The hardest financial skill is getting the goalpost to stop moving.
  2. Social comparison is the problem.
  3. “Enough” is not too little.
  4. There are many things never worth risking, no matter the potential gain.

4. Confounding Compounding

More than 2000 books are dedicated to how Warren Buffet built his fortune. But Buffet’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. He has been a phenomenal investor for three-quarters of a century. His skill is investing, but his secret is time. That’s how compounding works.

5. Getting Wealthy Vs Staying Wealthy

Good investing is not necessarily about making good decisions. It’s about making a good decision. It’s about consistently not showing up.

Getting money is one thing. Keeping it is another.

Housel summarizes money success in a single word ‘Survival’. It’s not growth or brains or insight. The ability to stick around for a long time, without wiping out being forced to give up, is what makes the biggest difference. Compounding only works if you can give assets years and years to grow.

6. Tails, You Win

You 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 million events. And most of our attention goes to the things that are huge, profitable, famous, or influential. When most of what we pay attention to are the result of a tail, it’s easy to underestimate how rare and powerful they are.

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

7. Freedom

Controlling your time is the highest dividend money pays.

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” Money’s greatest intrinsic value—and thus can’t be overstated—is its ability to give you control over your time.

8. Man in the Car Paradox

No one is impressed with your possessions as much as you are.

People tend to want wealth to signal to others that they want to be liked and admired. But in reality, those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.

9. Wealth is What You Don’t See

Spending money to show people how much money you have is the fastest way to have less money.

We tend to judge wealth by what we see because that’s the information we have in front of us. But the truth is that wealth is what you don’t see. Rich is a current income. Lavish car and big home. People go out of their way to make themselves known. But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. We should be careful to define the difference between wealthy and rich. Not knowing the difference is a source of countless poor money decisions.

10. Save Money

The only factor you can control generates one of the only things that matter.

Building wealth has little to do with your income and lots to do with your savings rate More importantly, the value of wealth is relative to what you need. A high savings rate means having lower expenses than you otherwise could and having lower expenses means your savings go farther than they would if you spent more.

11. Reasonable > Rational

Aiming to be mostly reasonable works better than trying to be coldly rational

Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.

Remember you’re not a spreadsheet. You’re a person.

Minimize future regret. It is hard to rationalize on paper but easy to justify in real life. A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down. Don’t be either irrational or rational. Be reasonable.

12. Surprise!

History is a study of change, ironically used as a map of the future.

Things that have never happened before happen all the time. History is mostly the study of surprising events. Experiencing or even studying what happened in the past might not serve as any guide to what will happen in the future.

Two dangerous things happen when you rely too heavily on investment history as a guide to what’s going to happen next

  1. You’ll likely miss the outlier events that move the needle the most.
  2. History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.

13. Room for Error

The most important part of every plan is planning on your plan not going according to plan.

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. Use room for error (or Margin of Safety) when estimating your future returns. It helps protect you from things you’d never imagine.

14. You’ll Change

Long-term planning is harder than it seems because people’s goals and desires change over time.

We are all poor forecasters of our future selves. We don’t know what the future holds. It is another to admit that you, yourself, don’t know what you will even want in the future. The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future.

Imagining a goal is easy and fun. Imagining a goal in the context of the real-life stresses that grow with competitive pursuits is something entirely different. When you are making long-term decisions, you should avoid the extreme ends of financial planning and accept the reality of changing your minds.

15. Nothing’s Free

Everything has a price, but not all prices appear on labels.

Successful investing looks easy when you’re not the one doing it. The inability to recognize that investing has a price can tempt us to try to get something for nothing. Market returns are never free and never will be.

16. You & Me

Avoid taking financial cues from people playing a different game than you are.

Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games that you are. Define the game you’re playing and make sure your actions are not being influenced by people playing a different game.

17. The Seduction of Pessimism

Pessimism is more common than optimism as it also sounds smarter, intellectually captivating. It’s paid more attention than optimism.

Growth is driven by compounding, which always takes time. Destruction is driven by a single point of failure, which can happen in seconds, and loss of confidence, which can happen in an instant. It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking for a long stretch of history and developments, which people tend to forget and take more effort to piece together.

18. When You’ll Believe Anything

Why stories are more powerful than statistics?

Stories are by far the most powerful force in the economy. There are two things to keep in mind about a story-driven world when managing your money. The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true. Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.

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