Quick Summary: In The Psychology Of Money by Morgan Housel, you'll learn how most people are usually wrong about money and how luck and risks are often underestimated while making financial decisions.
The Psychology Of Money Summary (PDF)
Let's dive right in!
Key Idea #1: "No one is crazy" when it comes to money.
The author says that when it comes to money, no one is crazy.
We all make money decisions, right?
It doesn't matter whether that money is yours or you've borrowed it from someone.
Maybe you are self-employed or a student who still depends on his parents.
It doesn't matter.
The point is:
We all make decisions.
And the crazy thing is:
What makes sense to us might not make sense to someone else.
The author says that most of our financial decisions are based on our beliefs.
Everyone has different beliefs. So we make different choices with our money.
So how do we decide: Who is right and who is wrong?
There is no one absolute answer for that.
If you feel that someone is crazy if he buys a Ferrari, then let that be.
Because it might look expensive to you. But to the other person, that's the most sensible choice at that moment.
We never fully realize what the other person is thinking unless we are on a higher consciousness level. Which is when we are extraordinarily self-aware of ourselves.
Sadly, most people aren't so self-aware.
So people act based on what they believe is true. Right? That's beliefs for ya!
The author gives an interesting example:
Let's say you put two finance experts in front of each other. Both will come up with their own best strategies.
Although both are experts on the same topic, they may make different decisions.
What's causing that? Again, it's their beliefs that cause the difference in the opinions.
They both have traveled different paths in their life even though they belong to the same industry.
Back to the point, no one is crazy.
I understand how weird this sounds.
To you, no doubt, some people will seem crazy.
But remember this:
Their actions are based on what they believe is right.
Yes, beliefs can be wrong. That's another topic.
Maybe they could take a different decision and get better outcomes.
The fact is:
You can't change beliefs instantly.
Also, you can't be really sure if your beliefs are correct or not?
Because people have been wrong so often already, right?
Humans have made a lot of mistakes in the past due to their wrong beliefs.
Again, if you look back at our ancestors, they would look crazy.
Funny, isn't it?
The reality is: they were doing what they thought was the best possible option at that time.
Key Idea #2: "Recognize the role of both luck and risks in life."
This was an epiphany for me.
We often admire successful people, right?
We think that they got successful because they worked hard. They earned it all, right?
Well, not really.
Not all success is due to hard work.
Allow me to explain:
By giving all the credit for a person's success to hard-work alone, we ignore the element of luck in a person's life.
I get it. Most people don't like calculating probabilities.
Maybe you think that "luck" doesn't exist.
Maybe you believe that you control your destiny.
I'm not against any of it. Believe whatever you want to believe.
But the truth is:
Sometimes, people get lucky. This can be due to a myriad of other reasons.
Ignoring the "luck" factor entirely isn't the right approach.
The author gives the example of Warren Buffett.
Do you really think that he never got lucky while investing?
Nobody can't say for sure. But the "luck" factor can't be eliminated entirely.
The author says that both luck and risks are siblings of each other.
Stock markets can be risky. But you can also get lucky if you know how to play the stock market game right.
Not acknowledging the luck and risks in life will give you an impression that you are in full control of your life. You then think that whatever you do directly impacts your outcome.
In most cases, it may even be true. I don't know.
But in the end, there could be different possibilities.
The smart way is to acknowledge and consider all the subtle factors that may affect an outcome and not base our decisions solely on our actions.
Another thing that surprised me was:
We can emulate successful people and try to achieve the results they have.
You can copy all the strategies and tactics of successful people. You can read all the books written by them and try to understand their philosophy and core beliefs.
But you can't copy their luck.
You can't have the same luck as them.
I know, it sounds so pessimistic.
I felt the same when the author said that.
Sadly, it's true.
Their life is different than ours, right?
Our best shot would be to be aware of the subtle factors like luck and give it our best try.
It'd be even better if you don't directly copy the successful people.
Try to come up with your own ideas. Experiment yourself.
Key Idea #3: "Enough is not too little."
Humans are weird.
We want to earn money. Cool.
But how much do we really need?
We don't question ourselves.
We just keep chasing more and more money.
Most of our goals are set around money too. Again, I'm not against any of it.
Just think about it.
What if someone gives you all the money in the world?
What will you do with it?
There has to be an end to it, right?
People who earn 5-figures desire to make at least 6-figures.
Then there are others who are still not satisfied with a 7-figure income.
We keep adding more and more items to our To-do lists.
Some say, "I just want enough money."
So how much is "enough" for you?
According to the author, our definition of "enough" is wrong.
We don't know what "enough" even means.
It looks as if "enough" is a sign of mediocrity. Nobody wants to be there.
Here is the truth:
"Enough ≠ too little."
If your goal is to have enough money, you have to stop somewhere. Then look at other things that are far more important than money.
Like freedom, simplicity, trust, honesty. Yes, these values are far more valuable. You can't buy them with money. They are uncountable, aren't they?
Having more money isn't a bad thing. In fact, it's fantastic to have so much money. It opens up a whole lot of possibilities for you.
But you should be clear about how you want to play the bigger game of life.
Maybe your money goals are on a treadmill: you keep running after them. Every time you reach your goal, it moves ahead.
We'll talk more about that the another time.
Let's move on to the other key idea.
Key Idea #4: Most of us are not good at compounding.
If you have heard about investing, then chances are you must have also heard about the power of compounding.
Even Albert Einstein said that "Compound interest is the eighth wonder of the world."
So what makes compounding so interesting that even the legend Einstein acknowledged it?
From what I've understood from this book as well as all the other resources I've consumed, the thing is:
We are not good with time.
That's the reason most people are terrible at compounding.
Let me explain with an example:
Let's say you write 500 words a day.
Now imagine you keep doing this for a year (365 days).
What do you think would happen?
You won't believe me, but many people have become financially free after doing this.
If you keep writing every day for a year, you won't be the same person anymore.
I mean, you would turn into an amazing person.
Put another way, if you keep adding small victories each day, you will become highly skillful. And that would allow you to become financially free.
Transferring the same concept to investing:
If you invest a small amount every month. Over the years, your money will grow. It'll keep on compounding.
That's the reason people say, "The earlier you start, the better."
You must be thinking, "If this is so cool, then why most people never do it?"
The reason is:
They don't realize the concept of compounding. Remember? Most people are not good with time.
That's the reason people put the wrong things on their calendars.
That's the reason our priorities are wrong.
That's the reason we do things that are not important in the long-term.
That's the reason that not all people are great visionary leaders.
I can go on and on about it!
I'm glad that the author raised this point in this book.
You can achieve so much if you learn the art of compounding.
The best part?
Compounding works in almost every aspect of your life.
Key Idea #5: Getting money is one thing - keeping it is another.
Most people get good at getting money. But a majority of people fail at keeping money.
Allow me to explain.
To understand this better, you need to ask these questions:
How do people get SUPER rich in the first place?
Is it by getting more money? Or by saving it?
Earning money can be painful. But the real struggle is when you realize that you need to start saving it if you ever want to become wealthy.
There is a difference between getting rich and staying wealthy.
These two require different attributes.
To earn money, you need to play the money game.
Sometimes, you'll win. Sometimes, you'll lose.
The author again talks about Warren Buffett.
He says that Warren Buffett got rich because he survived during multiple recessions. He patiently played the game of investing, where most people would easily give up.
If Warren didn't have such attributes, he wouldn't be that rich, right?
Let's say you win a lottery today.
Now what you do with that money would determine if you'll stay wealthy or not.
Most people would start throwing lavish parties, go on vacations, travel around the world buying exotic luxuries.
They are indeed rich. They have money.
But the real art is in staying wealthy over the years.
Imagine if Warren Buffet had started spending his money on consuming every shiny thing in the world. Would he be as rich as he is today? Certainly not.
You need to be consistent here.
The author says that you need to make sure that you don't screw up.
Put in other words: Don't lose your money while you build wealth.
For instance, if you invest money in the stock market, play the long-term game. Allow your wealth to grow over the years.
The author says that asset-building takes time.
And if you don't give proper time to your assets, they don't grow to their full potential.
Don't make snap decisions without proper analysis.
If you screw up consistently, you'll become poor fast instead of becoming wealthy.
Key Idea #6: It's okay to lose at the money-game.
The author talks about big companies like Amazon in this book.
He talked about how Jeff handled failures in his journey.
Ordinary people think that giant companies never experience failures.
For instance, Amazon once released the Amazon Fire phone. Which, the author says, was a colossal failure.
Yes, Jeff lost a hell lot of money in that.
But did they stop? Hell no.
In fact, Jeff learned from his failures and took the entertainment industry by storm by releasing Amazon Prime.
Which is a huge success today.
These days, it competes with Netflix.
What should you learn from all this?
The biggest lesson you can learn from this is:
You can lose 10 times and still win.
Sound crazy, right?
Yes, it's true.
It's like playing a game. You can lose multiple times. And still, there will be a probability that you'll win.
Luck can also help sometimes.
Am I saying that you should keep losing and depend on luck all the time? No.
The point is:
It's okay to fail.
People have failed a lot in the past. And still made a fortune.
Not all of your efforts will bring the outcome you desire. But some of them will do.
And those will change your life!
Key Idea #7: Money is not the highest form of wealth.
"Wait, what did you just say?"
Allow me to elaborate.
I'm not saying that money is not important.
The point here is:
It's not the ultimate thing.
The author says that the freedom, which you get with the money, is far more precious than the money itself.
If all the money in the world doesn't give you freedom or happiness, then what's the point of attaining it?
Right from school, we are taught that money is essential.
But nobody tells the whole story.
Are you getting more freedom or slavery? What does the money you earn give you?
The truth is:
Money helps you buy time and freedom.
Let's say you own a small business.
Now, if you have enough money, you could hire people to do your tasks.
By doing that, you'd ultimately buy yourself more time. Right?
So what's the ultimate form of wealth here?
Is it money? No.
It's the value you get with that money. That's the ultimate wealth.
I once heard that "Money is spiritual."
"If money were material, a penny would be more valuable than a $10000 bill."
Key Idea #8: You think money will help you look cool? Think again.
A common notion people have is:
If they show-off how rich they are, people will start admiring them.
You know what I'm talking about, don't you?
You know the people who show off their branded clothes and luxurious lifestyle?
The author says that it's a paradox. How?
Well, what really happens is that people hate those people. But deeper, they desire to be like them.
It's a paradox in itself, isn't it?
So yes, more money won't necessarily make you look cool.
Also, it may even make you poor in the long. If you only spend your time doing such things, you'll soon wonder why you are not getting any more wealthy.
Key Idea #9: "Wealth is what you don't see."
You can see the money. Don't worry.
It's wealth we're talking about here.
I used to think the same way. Until I read this book!
The author says that being rich is not the same as being wealthy.
The money that rich people have is easily visible or expressed through their lifestyle.
It's not that you can't spot wealthy people.
The fact is:
The real wealthy people don't show their entire wealth.
Wealthy people sometimes also express their richness through their lifestyle.
But then you only see the tip of the iceberg.
You don't get to see the full picture.
I know, it's hard to grasp.
Let me make it more clear.
You never know how much wealth a person has collected unless you see his bank account details, the assets he has built, and the businesses he has invested in.
Whenever we call a person rich, we look at his lavish lifestyle and declare him as rich or wealthy.
We never draw a clear boundary between rich and wealthy.
Weirdly, poor people can also appear rich. And wealthy people can also appear poor.
So don't trust your eyes that much.
Yes, a wealthy person can show how cool he is through his fancy jewelry. Just remember that you still don't have enough idea of how wealthy he is.
I guess you got the point now.
That's the reason, the author says, you shouldn't imitate rich people.
You just don't know enough.
Key Idea #10: "There ain't no such thing as free lunch."
Nothing could be more true than this.
What you think is free isn't actually free.
The author says that not all prices appear on the label.
Allow me to explain this with an example.
We have been conditioned to determine the price of a commodity by looking at its price tag.
So how is the price of any product determined? There are a lot of factors that determine the price. I'm not going to explain all of them.
You just understand that price is a perception.
For instance, nobody can determine the price of an apple. It has come from nature, isn't it?
The price tag is put by humans only.
In fact, what you think is priceless is actually far more valuable. Take the example of oxygen. If you don't get oxygen, you'll die.
Isn't it the most expensive thing in the world?
This further proves the point that nothing is as valuable as we think. There is no way to determine the right price of any commodity.
In the end, price is a highly subjective term.
So what you think is free is actually pretty expensive. And what you think is expensive isn't really that valuable. It's because of your perception that you believe it's valuable.
You're always paying the price. No matter what you buy.
Not all value exchange can happen with money.
For instance, you can't put a value on freedom. It's uncountable.
Again, money can help you attain freedom. But freedom in itself is an invaluable thing.
The Key Takeaways From The Psychology Of Money Summary
- "No one is crazy" when it comes to money.
- "Recognize the role of both luck and risks in life."
- "Enough is not too little."
- Getting money is one thing - keeping it is another.
- It's okay to lose at the money-game.
- Money is not the highest form of wealth.
- You think money will help you look cool? Think again.
- "Wealth is what you don't see."
- "There ain't no such thing as free lunch."
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The Psychology Of Money Review
While I was reading this book, the biggest realization for me was that most people aren't good at the psychology of money.
We think we know everything.
But the reality is:
We don't know shit.
I know that sounds harsh. Anyway, it's right for most people.
Don't worry! Even experts make mistakes.
The so-called finance gurus too make bad decisions.
That's why understanding the psychology behind money is extremely crucial. It'll help us make better decisions.
Your Turn Now
That's it for today.
I hope you enjoyed this summary and learned a lot about the psychology of money.
If you liked this, feel free to share it with your friends.
Also, let me know your thoughts in the comments below. I'd highly appreciate it.