Book Review: "The Psychology of Money" by Morgan Housel
When it comes to personal finance, many people think the key to success lies in understanding complex formulas, stock market trends, and complicated investment strategies. However, Morgan Housel, suggests that the real key to financial success might be closer to home—in our minds and in our behaviors. His book explores the psychology behind financial decisions and explains why understanding human behavior is crucial for achieving financial success. In this blog post, I'll share some of my favourite insights from "The Psychology of Money" and explain why, in my opinion, this book is a must-read for anyone interested in personal finance.
About the Author
Morgan Housel is a partner at the Collaborative Fund, a former columnist for The Wall Street Journal and The Motley Fool, and a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers. He certainly knows a thing or two about money, and he brings a unique perspective to his writing, blending storytelling with financial expertise. Throughout the book, Housel draws on his experience working in finance while he examines the role of psychology and human behavior plays in decision-making around money. This book is filled with valuable insights into why people make the choices they do, and how it impacts their money situation short-term and long-term.
My Thoughts
I thoroughly enjoyed this book! I wish I had read it earlier in my personal finance and investing journey, as it served as a great motivator without using the confusing financial language that often makes investing intimidating. While it didn't provide actionable directions on how to optimize your finances or start investing, the author shared incredible stories that helped reframe my mindset on money and wealth, giving me a significant boost in motivation to keep going. This is a great read for someone who is thinking about starting to improve their money situation, or someone who is new to investing.
Key Learnings from the book:
"The Psychology of Money" is a collection of stories and lessons that delve into the emotional and psychological aspects of money management. Here are some key learnings from the book that I think will help you understand the impact that your behaviors have on your long-term financial success:
1. Behavior Drives Financial Outcomes
Morgan Housel argues that financial success is more about behavior than intelligence. You can be a mathematical genius, but if you can't manage your emotions and impulses, you might struggle to achieve financial stability. Think about all the once-rich NBA players or lottery-winners who have had to declare bankruptcy year later (FYI, it’s a shockingly large number). He emphasizes that our behavior is what ultimately determines our financial outcomes, not our knowledge of technical concepts.
2. The Illusion of Control
One of the key points Housel makes is that many people believe they have more control over financial outcomes than they actually do. He explains that luck and uncertainty play significant roles in investing and personal finance. Understanding this can help reduce stress and anxiety when things don't go as planned, and it encourages us to focus on what we can control—our behavior and long-term strategies. Many of the world’s most successful people gained their fortunes (at least partially) through luck. Entering the right industry just as it begins to boom, having connections who gave them a heads up on a “cool new company” (like Google back in the early noughties), or attending a school just down the road from where one of the first computers was located and getting access to learn how to use it through a school club (looking at you, Bill Gates). For every successful wealthy person, there are hundreds who tried the same techniques and failed. Luck plays a larger role than many of us are willing to admit when it comes to success.
Side note: If you haven’t read Outliers by Malcolm Gladwell, it’s all about the concept of how much luck plays into our successes and failures. I highly recommend giving it a read too!
3. The Pitfalls of Overconfidence
Overconfidence is a common trap in finance. Housel shares stories of people who took excessive risks because they believed they were smarter than the market, only to face significant losses. He encourages humility in financial decision-making and advises against assuming that past success guarantees future results.
This is an incredibly important concept to master when you start investing- it’s easy to get caught up thinking that since you or a friend were successful doing something once, you can easily replicate it. Past performance by no means guarantees future the same performance in the future.
4. The Importance of Simplicity and Patience
Housel advocates for a simple and patient approach to investing. He suggests focusing on low-cost index funds (for example, individual index funds, target-date index funds, individual ETFs, and all-in-one ETFs) and avoiding high-cost investments like mutual funds (those fees have a detrimental effect on your retirement nest egg). He also recommends making sure your investments are diversified- in other words, don’t throw all your money into the American tech industry! You should spread it out across industries and across countries, which many index funds and ETFs will do for you. And lastly, he strongly encourages you to aim for long-term growth rather than chasing quick profits or complex strategies. Stay away from the Reddit stocks and focus on the boring, slow but steady investments (like index funds and ETFs). The book also stresses the value of patience, noting that successful investing often requires time and discipline. One of the most important principles of investing is to not panic sell- if prices drop don’t panic, and patiently wait for it to recover.
5. Wealth Is What You Don't See
Housel discusses the concept of "invisible wealth." He explains that true wealth is not about flaunting your success or material possessions; it's about having the freedom to make choices and the security to weather financial storms. This perspective encourages readers to prioritize financial stability and long-term goals over conspicuous consumption. If you look around at your friends and family, the ones with the giant house, the latest gadgets, and the new cars are often the ones who carry the most debt (and the least amount of wealth). It’s hard not to look at those people and feel jealous of what they have, but don’t forget that you can’t see their bank account- you might have $100k already saved for retirement while they’re struggling to keep up with minimum payments on $100k in loans.
6. Building a Personal Relationship with Money
"The Psychology of Money" encourages readers to build a personal relationship with money based on their values and goals. Housel emphasizes that everyone has a unique financial journey, and there's no one-size-fits-all approach. To me, wealth means having the freedom to spend my time doing what I want, when I want, and with who I want! My version of wealth means not having to work in a job that I dislike just to pay the bills. Someone else might view wealth as having the freedom to travel the world and experience new cultures, without worrying about how they’re going to foot the bill. And to someone else, wealth might mean having a house fully paid off in a neighbourhood they love, where they feel safe raising their kids. And of course there are others who view wealth as having a large customer house filled with all of the latest gadgets and fancy sports cars. It’s all subjective, and so our plans on how much wealth we need and how we plan to build it will defer quite a bit! He encourages readers to think about what financial success means to them and to align their behavior with those values.
Final Thoughts:
If you're looking for a book that explores the human & mindset side of money management and investing, "The Psychology of Money" by Morgan Housel is an excellent choice. The book's approachable writing style and engaging storytelling make complex financial concepts easy to understand. He does a great job of focusing on the “why it matters” and avoids using too many finance terms (even my teenage cousin enjoyed reading it!). By focusing on behavior and the psychological aspects of money, Housel provides readers with a fresh perspective on personal finance.
I highly recommend picking up a copy of "The Psychology of Money" or borrowing it from your local library. It's an insightful and thought-provoking book that can change the way you view money and financial success. Whether you're a seasoned investor or just starting your financial journey, this book offers valuable lessons that can help you make better financial decisions and achieve your goals. Happy reading!
About The Authors
Amanda and Siobhan found a shared passion for personal finance shortly after completing their MBAs in 2018. Amanda excelled as a Director of Product in the tech industry, while Siobhan established herself as a leader in e-commerce before transitioning to academia as a Professor.
In 2020, they joined forces to found Hiver Academy, a platform born from their own experiences and triumphs in conquering student loans and building wealth. Realizing that financial success is within reach once the complexities are simplified, their mission now revolves around empowering individuals to achieve financial freedom.
With a wealth of knowledge and a commitment to demystifying money and investing, Amanda and Siobhan are dedicated to helping others navigate the path to success.
