Review: "The Psychology of Money" by Morgan Housel
Our behavior with money is associated with our psychology.
I frequently delve into the study of financial management. Ever since my 10th-grade economics class, I've been an occasional reader of Yahoo Finance. Recently, I came across a staggering statistic - American household debt is now at a record $16.9 trillion. This fact has spurred my curiosity, particularly about psychology's role in shaping fiscal responsibilities. As the blurb on the back says:
Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.
The Psychology of Money contains 20 insights into the impact of behavior on finances. Each chapter features anecdotes to drive the point; it reminds me of a lite version of The 48 Laws of Power or other self-help books that try extracting a theme from cherry-picked stories and quotations. But, unlike The 48 Laws of Power, this book is condensed, digestible, and — as an effect — memorable. I want to highlight the takeaways that were most significant to me.
6. Tails You Win
A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy. (p. 77)
In our roles as consumers, our perspectives are often limited to the polished, final version of products we see on the shelves or online. The setbacks and losses incurred during the production process are typically hidden from view unless one takes the initiative to delve deeper. Business success, in many instances, is not an overnight occurrence. It results from a long-tail distribution model, which describes a scenario where many products contribute a small amount to the overall sales.
The most celebrated successes in this model typically revolve around selling a few units of many different products rather than relying on a single product for most sales. This strategy spreads the risk and allows for a diversified product portfolio. If one product fails to perform as expected, it can be compensated for by the sales of the other products. In other words, while appearing counter-intuitive to those who associate success with mass sales of a single product, this long-tail strategy often forms the foundation of sustainable success in many industries.
12. Surprise!
The most important events in historical data are the big outliers, the record-breaking events. They are what move the needle in the economy and the stock market. (p. 125)
The world is surprising. Morgan posits the world would look like a different place had a few people never existed:
Adolf Hitler
Joseph Stalin
Mao Zedong
Thomas Edison
Bill Gates
Martin Luther King Jr.
Reading this chapter reminded me of the "Great Man Theory," a concept put forward by Scottish writer Thomas Carlyle, though not directly referenced by the book's author. This theory posits that history is fundamentally shaped by the actions of highly influential individuals, who, leveraging their unique abilities or positions of power, catalyze significant and transformative events. Often seen as heroes, leaders, or visionaries, these individuals imprint their will upon the world, altering the course of history.
Modern interpretations have criticized the Great Man Theory, arguing that it simplifies the complexities of historical causality and change, overlooking the importance of societal structures, cultural trends, and economic conditions. Yet, this theory underscores the potential magnitude of key events triggered by influential figures, affirming their substantial impact on the global stage.
Such transformative events, often unpredictable in their occurrence and consequences, highlight the inherent uncertainties in predicting the future. They are stark reminders of how singular actions or decisions can reshape our lives and world. Despite our best efforts to anticipate future trends and events, the influence of these 'great' individuals can suddenly alter expected outcomes, presenting us with surprising and sometimes challenging realities.
Therefore, the primary lesson we can glean is the importance of resilience and adaptability. We must be prepared to navigate unexpected changes and understand that the future will always hold surprises. We should embrace this unpredictability as a part of life and continually adapt, learn, and grow in response to the evolving world!
17. The Seduction of Pessimism
Optimism is the best bet for most people because the world tends to get better for most people most of the time. (p. 177)
In the opening of this chapter, Morgan advocates for optimism as a rational stance, suggesting that "the odds of a good outcome are in your favor over time." It posits that projecting a positive future based on past events is reasonable, despite long-tail distribution, a concept Morgan highlights in earlier chapters. My optimism stems from the benevolent universe premise, the belief that while accidents occur, the attainment of values is standard due to the nature of reality as causal. We maintain the freedom to confront and overcome adversity when it arises!
Yet, the crux of this chapter is that pessimism often garners more attention as it presents as new and fresh. For instance, consider the recent news on approaching the debt ceiling. Despite such issues, it's crucial to maintain a broader perspective. Over the past century, humanity has seen significant improvements.
A fascinating aspect is how evolutionary factors might explain our instinctual leanings toward protectionism and risk aversion. This might help illuminate why negative predictions or news frequently seem more compelling, even when the trendlines of progress suggest optimism is the more rational stance.
Conclusion
This book has significantly enhanced my understanding of the relationship between behavior and financial attitudes and habits. Morgan utilizes a balanced approach, providing succinct stories in each chapter to illustrate the key points without overcomplicating things. The book is engaging and digestible, allowing you to consume several chapters in one go comfortably. Given the wealth of insights packed into each page, it provides excellent value. If you're not usually a fan of self-help books but have a keen interest in finance, I highly recommend reading this book!
Are you interested in following my reading list? I’m updating my Goodreads for 2023, so let’s be friends on the platform. Let’s see how many books I can finish in 365 days!