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18 lessons from "The Psychology of Money"

Updated: Aug 18, 2021

Author- Morgan Housel

  • Understanding the meaning of the book

Managing money and handling your own finance is considered to be involved with a lot of mathematical calculations and spreadsheets. But Morgan Housel says that handling money is more often about psychological terminology rather than mathematical. Financial decisions are mostly made at a dinner table and not on spreadsheets. He has explained the financial mindset of people and how you can make money-related decisions better in an easy and clear way in really simple words. Here are the 18 lessons from "the psychology of money". This book contains amazing stories in which he gives the proper context with spot-on statistics about finance. I am mentioning only the notes right here if you want to enjoy it in a better way please read the book. The book notes are a bit lengthy but they are worth it and every point feels important in this book so here is the summary.

  1. No one is crazy with their money. It's just the experience we have that makes us to take decisions that might seem crucial or crazy to others. We might feel our way of investing or using money is proper because we tell ourselves a story which relates to our behaviour and the experience we had. Not intelligence, or education, or sophistication. Just the dumb luck of when and where you were born decides the way you approach personal finance. Your personal experience with money makes up maybe 0.00000001% of what's happened in the world, but maybe 80% of how you think the world works.

  2. Nothing is as good or as bad as it seems. Luck and risk are siblings. They are both the realities that every outcome in life is guided by forces other than individual effort. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take. Someone else's failure is usually attributed to bad decisions while your own failures are usually chalked up to the dark side of the risk. When you deal with your own failure you make up some weird story which supports bad outcomes of risk and not the wrong decisions. 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.

  3. The hardest financial skill is getting the goalpost to stop moving. We keep on thinking that's less what we have and we keep on trying hard to achieve more and more and until we hit the wall we don't realize we were greedy. Happiness is Results - Expectations. Social comparison is a major problem. The ceiling of social comparison is so high that virtually no one will ever hit. It's a battle that can never be won.

  4. Good investing isn't necessarily about earning the highest returns because the highest returns tend to be one-off hits that can't be repeated. It's about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That's when compounding runs wild. When it comes to compounding the way you have to go is just shut up and wait. The highest returns are always delayed.

  5. Good investing is not necessarily about making good decisions. It's about consistently not screwing up. Compounding only works if you give an asset years and years to grow. But getting and keeping that extraordinary growth requires surviving all the ups and downs that everyone inevitably experiences over time. What is more important than high returns is actually being unbreakable financially.

  6. Anything that is huge, profitable, famous, or influential is the result of the tail event which is one in thousands or millions of events. Most of our attention goes to things that are huge and profitable. Most of what we pay attention to are the result of a tail. A good definition of an investing genius is the man or woman who can do the average thing when everybody around them are going crazy.

  7. It's not money which makes people happy but the control over their time to do anything you want, whenever you want, with the people you want is the broadest lifestyle variable that makes people happy. Controlling your time is the highest dividend money pays. What people actually value are the things like friendships, spending quality time with their children, or even being part of something bigger than themselves.

  8. No one is impressed with your possessions as much as you are. People want to signal to others that they should be liked and admired. But in reality, the 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. We tend to judge wealth by what we see because that's the information we have in front of us. There is no faster way to feel rich than to spend lots of money on really nice things. the way to be rich is "to spend money you have and to not spend money you don't have".

  10. The only factor you can control generates one of the only things that matter. Building wealth has very little to do with your income or investment returns and lots to do with your savings rate. Having a high savings rate means having lower expenses. Learning to be happy with less money creates a gap between what you have and what you want. The value of wealth is relative to what you need. Spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income as a way to spend money to show people that you have money.

  11. Reasonable is more realistic and you have a better chance to stick with it for the long run. Minimizing future regret is hard to rationalize on paper but easy to justify in real life. You need to think according to your ease what floats your boat.

  12. Things that had never happened before happen all the time. Investing isn't hard science. It's a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy, and paranoid. The correct lesson to learn from surprises is that the world is surprising. The most important economic events of the future things that will move the needle the most are things that history gives us little to no guide about.

  13. The best wisdom is to have room for error. So if you mess up something you don't get wiped up completely. The only way to deal with such unpredictable situations is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.

  14. We keep on changing our goals and desires that's why it becomes harder to stick to our long-term goals. At every stage of our life, we make decisions that will profoundly influence the lives of the people we are going to become, and then when we become those people we are not always thrilled with the decisions we made. Compounding works best when you can give a plan years or decades to grow. The first rule of compounding is never to interrupt it unnecessarily.

  15. Everything has a price and the key to a lot of things with money is just figuring out what that price is and being willing to pay it. The price of a lot of things isn't obvious until you have experienced them first-hand when the bill is overdue. Every job looks easy when you are not the one doing it.

  16. Why the same sort of stuff keeps happening and constantly ruins our life and why we don't learn a lesson from it is because people get greedy and greed is an indelible feature of human nature. It grabs everyone's attention. An iron rule of finance is that money chases returns to the greatest extent that it can. When someone says this stock is doing extremely well you don't know for whom it is? Is it for the day traders or the long-term investors or a person having a very little budget? Day traders grab the attention of the people who want to invest for the long run which depresses the long-term investors when the stock goes down. So the thing is whenever it comes to investing or any other finance stuff the thing which worked for others may not work for you just if it has higher profit or higher interests. Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.

  17. Pessimism is seductive. It grabs our attention more than optimism does. When you tell someone everything will be great they will likely shrug you off but if you tell someone you are in danger you will have their undivided attention. Money is ubiquitous so if something bad happens it has everyone's attention. If there is a recession everyone is going to get affected and it will instantly grab attention. Progress happens too slowly to notice but setbacks happen too quickly to ignore. It's difficult to notice and get influenced by slow growth-related stuff but when it comes to stuff that is really volatile and more often tragic it gets noticed easily and more seriously.

  18. We are more influenced by the stories rather than the statistics. We believe more in the stories that people tell us. It creates a sense of belief when the stories are more optimistic even if they are fictional. People don't calibrate low odds like 1% they neglect these things. An appealing fiction happens when you are smart and you want to find solutions, but face a combination of limited control and high stakes.

  • Conclusion So these were the 18 lessons from "The Psychology of Money" it is a must-read book I have missed a lot of things, these were just the bits from all the lessons. It's an engaging and simple book about personal finance. I know it was a bit too big but if you had made it till here you would have got some wisdom hopefully.

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Great, Good to read this..... Thank you

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