The Psychology of Money: Summary & 10 Takeaway Points

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The Psychology of Money Summary

The Psychology of Money is a phenomenal book that was written by Morgan Housel and published in 2020. Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. In The Psychology of Money Housel is trying to teach the reader how to better approach money and finances in life, as well as understanding the psychology behind it. 

Hence, the Psychology of Money summary and the 10 main lessons that we at Investors Psychology thought were the most important. We highly recommend reading the full book if you have the time.

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The 10 Takeaway Points

1. Reality is not theory, theory is not reality

Housel makes the point that humans are not emotionless robots. Learning something new from a book or article is not the same at being able to apply that same new knowledge in real life. Actually weathering through a bear market is much easier said that done, even though you thought you would after learning a new (and risky) investment strategy. On the other hand you might experience fear of regret, not knowing when to get rid of your bad investments. 

2. Luck and Risk

Account of luck and the potential lack of luck in your investments. 

Poor investment decisions can turn to profit with some luck, while calculated and level-headed decisions can turn ugly if you're unlucky. Not only the market is uncertain, but the whole world is. Try to not praise or judge individuals too much, they might be the result of extreme luck or the opposite.

3. Never Enough

You'll never be happy if you just keep moving goal posts. There will always be someone wealthier than you. In the end, you need to compare yourself to your former self, not to anyone else. Comparison is the thief of joy. Sometimes you just need to know how to stop thinking about money.

4. Man in The Car Paradox

Speaking of comparison - people will not admire you because of you're expensive sportscar or luxurious villa. The only thing they'll do is wishing they had those things to themselves. They're not looking up to you because of the things you own, but because of who you are. Lead a good life and be a good person, and you can have the respect of others. That's something money can't buy.

5. Wealth is what you don't see.

Being rich is different from being wealthy. If you're earning a high salary you're rich, but wealth is something else, it's the money and investments in your bank account that's been built up for a long time and would last even longer - it buys you freedom of mind and time to enjoy other things. 

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6. The Psychological Benefit of Cash

A lot of investment strategies and financial advice might have you believe that cash doesn't do you any good, well if you're looking at that spreadsheet it might not. However, being liquid 20% instead of 5% will probably let you sleep much better at night, knowing you could afford to pay any unexpected life expenses. 

The also means you're leaving room for error, which is highly important. A lot of people seem to not understand that there is a difference between what you can technically endure vs. what you can emotionally endure. When the stock market cycle hits the decline phase and you're down a substantial amount - are you gonna sell at loss just because you didn't have a large enough emergency fund?

7. Pessimism Sells

Pessimism doesn't only sell in terms of articles in the media, but it sells itself into your psychology much more effectively as well. Meaning, pessimism is much more persuasive than optimism and it can be to resort to pessimistic thinking when things are doing as well, even though difficult times actually create the opportunity for problem-solving and feeds innovation. 

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8. The Price of Investing

Morgan Housel describes the emotional toll the market can have on one in The Psychology of Money. It's the hidden cost of investing, where your mind a couple of times a day wonders to your investments, both in good times and bad. In the latter, the emotional response might be higher, and it can inflict psychological pain several times daily. Unfortunately, it's something every investor just have to accept. 

9. Long Tails

'Long tails' refer to the farthest ends on the distribution curve. In investing, these play a very large role in terms of end result. Meaning, the investment decisions you make on 99% of days doesn't really matter. It’s the decisions you make on a small number of days when something big is happening that make all the difference in the end. Warren Buffet has invested in several hundreds of different companies during his lifetime, but he made the majority of his money on only about 10 of them.

10. Hindsight Psychology

As they say - Hindsight is twenty-twenty. Whenever we look back at the past we also create stories about why certain things played out they way they did. This makes us think we understand the world better, but a lot of the time it's utter nonsense. In investing especially, the factors that play a role in the outcome of a certain investment are so many that it's not unlikely to be largely random. Be careful with believing other peoples stories (or your own for that matter) thinking they can help you predict the future. They usually can't.

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The Psychology of Money Summary

In short, the book teaches you the basics of Investors Psychology and how to better approach money in an everyday life. The practical takeaways are from this book are simple and can be boiled down to 3 points.

• Don't be greedy.

• Consider that your emotions will always interfere with your current and future decisions.

• Wealth is a mindset and money grants you access to things more important than just expensive items.

Despite this you should read the book, as it does wonders for actually explaining the psychology behind these ideas. Context matters, and this book provides it.