Think About How You Think About Money
The Big Ideas from The Psychology of Money by Morgan Housel
The Psychology of Money (2020) by Morgan Housel is packed with insightful ideas.
It’s a book about the ways we actually think about money. It aims to teach us how to better deal with it so that we improve the quality of our lives.
Below is my list of the biggest ideas from the book.
Each point stands in isolation, but given that they’re interconnected, I’ve put them in an order I feel makes sense.
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Money affects you whether you like it or not
No matter who you are, where you live, or what you believe, you cannot escape the impact of money and the modern financial system on your life.
That’s why it’s key to understanding it: to minimise its negative impacts and maximise the positive impacts.
We’re taught to view the world of Finance as a hard science—it’s not
We are taught to look at Finance like something with rules and laws; not enough with emotion and nuance.
This dissonance means we haven't gotten better at dealing with money in a way that contributes to our happiness.
The financial system is driven by human behavior
The world of finance is driven by human behavior, which is as much the product of people's emotions and the stories they tell themselves, as it is rational decision-making.
How we behave is driven by the stories we tell ourselves
People don't make financial decisions based on a spreadsheet but make them from a narrative—one that makes sense to them. It’s a mix of their world-view, ego and pride; the impact of marketing and persuasion; and incentives.
Our worldview is built upon a minuscule part of the totality of life
Our experiences form a minuscule fraction of what actually makes up reality. As a result, we create narratives on the little we have experienced to fill in the gaps.
These narratives are misleading because—even though they are based on incomplete information—we take them as universal truths.
Lived experiences cut deeper than what we learn second-hand
Learning something intellectually might make you feel you understand but it will never recreate the power of firsthand experience. And it’s this power that often incites change.
Nobody thinks they’re making crazy decisions
Every decision, at the moment it’s taken, makes sense to the person taking it. Given the information they have, and their unique understanding of how the world works, if all their boxes are checked, they’ll make that decision.
More money doesn’t necessarily lead to more happiness
There is little evidence that people in the wealthiest counties are happier now than they were 50 years ago.
We’ve put a lot of wealth has gone into buying more material goods.
We've also given up more control over our time: a lot of jobs today are focused on thinking, which means we can’t clock off.
Technology has compounded this by ensuring that work can be done anywhere, any time. Thus, the mind is always on.
Pursue goals that are in line with the outcomes you desire
Clarify which outcomes you wish to one day see, then define goals that are aligned with that path.
Once you know that, make sure you don't pursue a life that follows someone else’s vision.
Do not let other people tell you what to do with your money.
People want control over their lives
Not having control over your time is a powerful and universal drag on happiness.
Even doing something you love on someone else's schedule can feel like doing something you hate.
For example, people will say no to things simply because they don’t feel in control of the decision.
Money’s greatest intrinsic value is its ability to give you control over your time
Use money in a way that helps you gain control over your time. Doing so will progressively give you more options.
This ranges from saving and/or investing enough to:
Cover for sick days
Take a job that's better suited to you
Retire on your own terms
At each step, you’ll increase your quality of life in a way that no thing can compete with.
Behavior is more important for financial success than being smart
Even if you know the rational thing to do, that doesn’t mean you’ll have the mental fortitude to do it.
Good decisions aren't always rational.
It's more important to prioritize your wellbeing over making the rational decision. Manage your money in a way that will not cause you unnecessary worry.
There are no right answers when it comes to dealing with money; only answers that work for you within the context of your own life.
Forget rationality. Aim to be reasonable
We are not spreadsheets.
We must embrace who we are when making financial decisions.
So make financial decisions by choosing what’ll help you sleep at night.
And what’ll minimize your future regret.
Avoiding mistakes is as important as doing things right
Good investing is as much about what you don’t do, as much as it is about what you do.
It’s about not screwing up.
Another way of looking at it:
You can afford to not be a great investor but you can't afford to be a bad one.
The most important part of every plan is it not going according to plan
A plan is only useful if it can stay in step with reality, and reality will always turn out differently than expected.
The more specific a plan is, the more fragile it becomes. So, in any plan you make, embrace room for error.
Risk is what’s left over when you’re convinced you’ve thought of everything.
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