Synopsis of the Psychology of Money Book Summary Author Says Money is everywhere, it affects all of us, and confuses most of us. Everyone thinks about it a little differently. It offers lessons on things that apply to many areas of life, like risk, confidence, and happiness. Few topics offer a more powerful magnifying glass that helps explain why people behave the way they do than money. It is one of the greatest shows on Earth.
THE PSYCHOLOGY OF MONEY BY MORGAN HOUSEL
The Psychology of Money Book Summary
The Author says people do some crazy things with money. But no one is crazy. Here’s the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.
Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take, and so on.
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. Those people can be misinformed. They can have incomplete information. They can be bad at math. They can be persuaded by rotten marketing. They can have no idea what they’re doing. They can misjudge the consequences of their actions. Oh, can they ever.
Tails, You Win
A lot of things in business and investing work this way. Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.
When you accept that tails drive everything in business, investing, and finance you realize that it’s normal for lots of things to go wrong, break, fail, and fall. If you’re a good stock picker you’ll be right maybe half the time. If you’re a good business leader maybe half of your product and strategy ideas will work. If you’re a good investor most years will be just OK, and plenty will be bad. If you’re a good worker you’ll find the right company in the right field after several attempts and trials.
The Author says something I’ve learned from both investors and entrepreneurs is that no one makes good decisions all the time. The most impressive people are packed full of horrendous ideas that are often acted upon.
“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune.
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness a universal fuel of joy it’s that people want to control their lives. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.
Money’s greatest intrinsic value—and this can’t be overstated—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.
A small amount of wealth means the ability to take a few days off work when you’re sick without breaking the bank. Gaining that ability is huge if you don’t have it.
The first idea—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
If you view building wealth as something that will require more money or big investment returns, you may become as pessimistic as the energy doomers were in the 1970s. The path forward looks hard and out of your control. If you view it as powered by your own frugality and efficiency, the destiny is clearer.
When you don’t have control over your time, you’re forced to accept whatever bad luck is thrown your way. But if you have flexibility you have the time to wait for no-brainer opportunities to fall in your lap. This is a hidden return on your savings.
Having more control over your time and options is becoming one of the most valuable currencies in the world.