Book Review: The Psychology of Money by Morgan Housel

After reading the last book on personal finance, I was suggested a new book, a NY Times bestseller, The Psychology of Money by Morgan Housel. In one of our hosted parties, Fahim (BUET CSE ’10) also suggested this book, so I thought this could be my next read. I grabbed the book from my local library.

I’ll be honest, I started the book a little bit skeptical. I did not really like the example between the janitor who left millions and the executive MBA who filed for bankruptcy. I get the point of saying “yeah, you can do this too,” but I also did not agree to this, because they happened to be an example at random. Being a scientist myself, I believe in the concept of statistics where the data doesn’t hold up. Although you might have a janitor who can make millions or billions, that is statistically a very low probability. So I was not fully sold on that idea; I started a little bit skeptical and I thought, OK, maybe this is another one of those books which doesn’t convey their message perfectly, rather tries to just exaggerate on their own thoughts.

However, my thoughts changed in the next chapters, as I saw that,

it is really not a book about money or money management; it’s a book about psychology, which just happens to discuss more about money and finance over everything else.

But still, it is a book about human psychology, how people think about their lives, ambitions, goals, happiness, future, prospects, and money, of course.

I’ll go over chapters and summarize what they’re saying in one sentence just as a log to myself because I want to reflect back on this later in my life.

• First chapter states, one’s personal experiences with money make up maybe .001% of what’s happened in the world, but maybe 80% of how one thinks the world works.
• Luck and risk are big reasons people do things in making financial decisions and winning those actions. An example from the book, Bill Gates went to a high school which had one of the few computers of the world at that time. It seems crazy because we now don’t know how many people could have been Bill Gates if they would also read in an expensive school and had parents’ seed money.
• One needs to learn to live within means and know when one has enough.
• Compounding is really powerful when money is in the market for a longer time, and money in the market always beats other financial decisions. Sigh, we were not lucky enough to start earning and investing before the pandemic, before interest rates spiked and before inflation went crazy. We know there would always be a wealth gap between people who locked in a low 30-year mortgage rate vs us, between people who bought AAPL at around ~50 in 2019.

“Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.”

• Tumpa and I have always focused on this, we don’t need a good return but we always actively work to check if we are wasting money or not.
• “You can be wrong half of the time and still make a fortune.” That is 100% correct, especially in the context that I recently started trading options, and the goal is to stay on the green side, along with occasional red sides.
• It seems common to think that money makes people happy or rather, wealthy people seem to be more happy, but it’s just not only because of wealth. A common denominator of happiness throughout different studies was that people want to control their own lives. And having sufficient or enough money lets people control their own lives and financial decisions. Our goal is to achieve financial and personal independence.

No one is impressed with your possessions as much as you are.

• The author also says that building wealth has little to do with one’s income or investment returns, and lots to do with their savings rate.
• There is always a fight between making a reasonable decision and a rational decision. For example, taking rest in the Dubai airport for one single night when I was fully sick back in 2023, it was certainly not a financially good decision, but it was a reasonable decision. And it paid off.
• We always look for historical maps to make a decision about the future, but the future rarely knows what’s coming up and probably doesn’t really have all those information from history. A common example is I can plan as much as I can about finances, but no one really knew in 2020 we’re gonna be hit with Covid pandemic.
• Keep some room for errors when we’re planning for something.
• Long-term planning is always harder than it seems because peoples’ goals and desires change over time.
• Everything has a price and nothing is totally free. There’s always some hidden cost or risk associated with it. Our hope is to analyze those risks and costs properly and make a fair judgment call. One should like risk because it pays off over time.

Be nicer and less flashy. Have less ego and more wealth.

• People are different. Beware of taking financial advice from people, they are playing a different game than you are.
• People always overestimate what they want to believe. The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.

Finally, I really liked this quote from the book; it shows peoples’ dual nature on thoughts on risk-reward:

I know people who think it’s insane to try to beat the (stock) market but encourage their kids to reach for the stars and try to become professional athletes. To each their own.

Overall, it was a good read. Many of the points I already knew, it just reinforced some ideas and shed light on different angles on many topics. Surprisingly, there was nothing new that I could learn from the book, we were already doing most of these just by our nature. This book doesn’t say what to do, what’s right and what not. It just lays down different paths for all of us, talks about how people from different backgrounds and times used to think of money and financial decisions.

Onto the next one.