The thesis of the book is that performing effectively with money has minimal to do with intelligence and a lot to do with behavior.
Being successful financially is not a hard science; it is a soft skill in which how you behave is more essential than what you know. Morgan refers to this soft talent as “the psychology of money.”
This book’s goal is to persuade you that pleasant tales are more significant than technical aspects of money. To understand why people get into debt, you must first examine the history of lust, insecurity, and optimism. The Psychology of Money depends on this blog article by Morgan Housel.
Chapter 1 – No One Is Crazy.
Your own financial experiences may account for 0.00000001% of what has happened in the world, but they may account for 80% of how you believe the world works.
Some lessons must be learned via experience before they are able to be understood. Michael Batnick’s We all decide based on our very own unique experiences, which appear to make sense to us at the time.
Chapter-2 – Luck and Risk
Luck and risk are siblings; they both represent the reality that all outcomes in life are influenced by influences that go beyond individual effort. The environment is too complicated to let 100% of your actions determine 100% of your results.
Nothing is as excellent or as awful as it appears when measuring financial achievement, both one’s own as well as that of others. Many riches and failures can be traced back to leverage. Take wary who you laud and adore, and who you glance down on.
When presuming that 100% of results may be attributable to effort and decisions, proceed with caution. Not all success results from hard work, yet not all hardship results from laziness. Remember this when assessing others, including yourself.
Concentrate less on single individuals instead of focusing on big patterns. Success is a bad teacher because it tricks brilliant people into believing they can’t lose. -Bill and Melinda Gates Failure can be a bad teacher because it tricks educated individuals into thinking their judgments were bad when they simply reflect the harsh realities of risk.
Chapter 3: Never Enough
Why would somebody worth thousands of millions of dollars be so anxious for additional money which they would risk everything to get it? (As suggested by the tales of Rajat Gupta and Bernie Madoff,) there is no need to risk what you have and need for what you don’t have and don’t need.
The most difficult financial skill involves getting the target post stopped moving. If aspirations rise with results, there is no use in trying for more because you will feel the same after investing in the extra work. Life is no joy unless you have a sense of sufficiency. Happiness is results minus expectations.
The difficulty is social comparison. The social comparison ceiling is so high that almost no one ever reaches it. That is, it will never be won. The most effective way for one to prevail is to never fight.
Accept that you may have more than others, even if it is less. Enough is never enough. Enough to understand that your insatiable want for more will drive you to regret. Many things are never worth the danger, regardless of the possible gain.
Chapter 4: Perplexing Compounding
Lessons from one discipline can frequently teach us vital lessons about unrelated fields. You don’t need a lot of force to get a lot of results. A little starting basis can lead to amazing outcomes when something compounds.
Linear reasoning is far more obvious than exponential reasoning. You never forget how rapidly things can increase with compounding. Compounding’s counterintuitive nature may be to blame for the bulk of failed trades, terrible tactics, and successful investing endeavors.
It is not always necessary to obtain the biggest returns while investing. Good investments is about generating reasonable profits that can be sustained over time. This is when compounding takes over.
This chapter contrasts investors Warren Buffett and Jim Simons. Jim Simons has the best annual returns of any investor, but has made less than Buffett because Buffett continued investing for far longer (with lower annual returns) and has had a longer period for compounding. Warren Buffett’s net wealth of $84.5 billion was $81.5 billion after he turned 65 years old.
Chapter 5: Getting Rich vs. Staying Rich
There are more than million different methods to become wealthy. The only way to remain affluent is to combine frugality and paranoia. Obtaining money is one thing; maintaining it is quite another.
To summarize financial achievement in one word: survival. Obtaining and retaining money are two distinct abilities. Obtaining funds takes taking risks, being positive, and putting oneself out there.
Keeping money demands the polar opposite of taking risks: humility and dread that what you’ve worked for can be snatched away just as quickly. It necessitates frugality and the awareness that perhaps some of what you’ve accomplished can be ascribed to chance.
The capacity to persist for an extended period of time with no wiping out or being compelled to give up is what makes the most difference. This should be the foundation of your investment, career, and business strategy.
Two explanations for why a survival mindset is essential when it comes to money. One: only a few advantages are so significant that they are worth sacrificing your life for. Two: the strange math of compounding. Compounding works only if you are able to allow assets years and years to increase.
Having an advantage and prospering are two distinct things; the first necessitates the latter. You must avoid disaster at all costs.
Chapter-6 – Tails, you win!
This is how a lot of activities in business as well as investing work. Long tails, or the extremes of an average distribution of consequences, have enormous sway in finance, where a tiny number of occurrences can account for the vast majority of outcomes.
It defies logic for an investor to be incorrect half of the time while continuing to make a fortune. Anything enormous, profitable, renowned, or influential is the outcome of a tail event, a one-in-thousands or millions of events.
The majority of our attention is drawn to things that are massive, profitable, well-known, or influential. When the majority of what we notice is the outcome of a tail, it’s easy to overestimate how uncommon and powerful they are.
The premise that a few factors account for the majority of results applies not only to businesses but also to your investing behavior.
Everything is driven by tails. When you recognize that tails drive anything in business, investment, and financing, you realize that many things will go wrong, break, fail, or fall.
Chapter 7: Liberation
The capacity to wake up and say, “I can do whatever I want today,” is the ultimate form of prosperity.
The ability to do anything you want, wherever you desire, with whom you want, and for whatever long you want is priceless. Money pays the highest dividend.
“Having a strong sense of controlling one’s life is an even more dependable predictor of a positive sense of wellbeing than any of the conditions of life we have considered.” Angus Campbell’s book The Sense of Wellbeing in America.
The broadest lifestyle component that makes people happy is control over doing whatever you want, when you want, with the people you want.
Money’s greatest inherent worth is its power to offer you control over your time, which cannot be emphasized.
To gradually gain a sense of freedom and autonomy as a result of unspent assets that allow you more control over the things you can do and the time you can do it.
Having six months of crisis funds means you don’t have to be afraid of your boss because you know you won’t be destroyed if you need to take a while off to look for a new job.
More importantly, it means being able to accept a lower-paying job with flexible hours or have a shorter commute.
Using your money to purchase time and options provides a lifestyle benefit that few luxury items can match.
We’ve spent our extra money on bigger and better things, but we’ve also given up more control over our time. These things, at best, cancel one other out.
Chapter 8 – The Man in the Car Paradox,
When you see someone driving a good car, you don’t usually say to yourself, “Wow, the guy driving that car is cool.” Instead, you say to yourself, “Wow, if I had that car, people would think I’m cool.” This is how individuals think, whether they are conscious or not.
The paradox of money is that people seek wealth in order to convey to others that they are liked and admired.
You may believe that you desire an expensive car, a high-end watch, and a large house. But I assure you that you do not; all you seek is respect and admiration from others.
You believe that owning expensive things will bring it to you, but it barely does, especially from those you want to respect and appreciate you. This is a passage from the letter that Morgan sent to his newborn baby.
People often want to be valued and appreciated by others, and spending money on frivolous items may result in less of it than you think.
If you want to gain respect and adoration, you should be careful about how you go about it. More respect will come from humility, generosity, and empathy than from horsepower.
Chapter 9: Wealth is What You Don’t See
One of the great ironies of money is that riches is what you don’t see. Many Ferrari drivers are average success stories who have invested a large portion of their earnings on a car.
Someone driving a $100,000 car may be wealthy, but the only information you have about their financial status is that they have $100,000 fewer debts than they did before buying the car, or $100,000 more debt.
We have a tendency to appraise wealth based on what we can see since that is the data we have at our disposal.
Wealth is the absence of good vehicles, diamonds, watches, and first-class upgrades. Wealth is defined as financial assets which have not yet been turned into the tangible goods you see.
Most people mean “I would like to spend a million dollars,” which is the polar opposite of “I want to be a millionaire.”
The only way to become wealthy is to avoid spending your money. It is not only the sole means to amass wealth, but it is also the definition of wealth.
We must be careful to establish the distinction between rich and wealthy; failing to do so leads to a plethora of unwise financial judgments.
A present income is considered rich. Someone who drives a $100,000 car or lives in a large house is almost likely wealthy, because the monthly payment requires a certain level of money. It’s not difficult to detect wealthy folks. They frequently go beyond their way to be noticed.
Wealth is concealed; it is revenue that has not been spent. Wealth is the choice to acquire something later that has not yet been exercised. Its worth is in providing you with the possibilities, freedom, and development needed to one day buy more items than you can now.
It is simple to discover wealthy role models, whereas it is more difficult to find wealthy individuals. Their success is, by definition, more elusive.
It is so entrenched in us that having money means spending money that we fail to recognize the restraint required to be wealthy. It’s difficult to learn about because we can’t see it. Because wealth is hidden, it is difficult to copy and learn from wealthy people.
The world is full of people who appear modest but are truly affluent, and people who appear rich but are on the verge of bankruptcy.
Chapter 10: Save Money
People must be persuaded to save money! People are divided into three classes after they reach a specific level of income.
Those who put money aside.
Those who do not believe they can save.
Those who believe they do not need to save.
Building wealth is heavily influenced by your saves rate rather than your income or returns on investments. If you believe that accumulating wealth calls for more money or large investment comes back you may become overly pessimistic.
Wealth is simply the leftovers once you spent what you take in. You can accumulate money without a high income, but you have no chance without a strong savings rate.
Learning to be content with less money widens the distance between whatever you’ve got and what you desire. Spending above a certain level of materialistic is mostly a manifestation of ego pursuing income. A method of spending money to demonstrate to others that you have (or have had) money.
One of the most effective ways to improve your savings is to increase your humility, not your income. Savings bridges the distance between your pride and your paycheck. The intangible rewards of money can be significantly more important and capable of boosting your pleasure than the material items that are obvious objects of our savings.
The ability to be flexible and in control of your time is an unanticipated return on investment. Having greater influence over your time and alternatives is quickly becoming among the most precious currencies in the world.
Chapter 11: Reasonable -> Rational
When making financial judgments, attempt to be reasonably reasonable rather than coldly rational.
Reasonable investors who enjoy their technically flawed methods have an advantage since they are far more likely to remain with them.
Few financial variables are more connected with performance than a strategy’s commitment during its lean years.
The historical odds of profiting in US markets are a 50:50 over one day, 68% over one year, 88% over ten years, and 100% over twenty years. Anything which keeps you in the action has a measurable benefit.
Chapter 12: What a Surprise!
When you depend too much on investment history to predict what will happen next, two risky things happen.
One: you will almost certainly overlook the outlier incidents that have the greatest impact.
Two: because it does not account for structural changes important to today’s reality, history can be a deceptive guide to the future of the world’s economy and stock market. For instance, the 401K is forty-two years old, while the Roth IRA was established in the 1990s.
The role of surprises is an extremely common plot in economic history.
Recognizing that the future may not look like the past takes a specific type of expertise.
What should we consider and plan for in the future?
