The Psychology of Money Summary & Infographic | Morgan Housel

Timeless Lessons on Wealth, Greed, and Happiness

1-Sentence Summary

The psychology of money is the study of how our thoughts, emotions, and behaviors influence our financial decisions, often leading to irrational choices driven by cognitive biases, personal experiences, and social influences rather than purely logical reasoning.

Disclaimer

These key insights and analysis are provided for educational purposes only. Please consult a professional before taking any action.

Introduction

Do you want to be rich or wealthy? Did you know there was a difference between the two?

The Psychology of Money explains what that difference is. In this digestible book, Morgan Housel shares 19 short stories illustrating how we think about money. 

He considers how past experiences can worsen our long-term financial gains. Moving the goalposts and being coldly rational can have a similar effect. Instead, set clear and sensible financial goals that don’t depend too much on how things have been in the past.

The Psychology of Money covers a lot of ground in just over 200 pages. This is the book for you if you’re looking for ways to be wealthy, not rich.

About Morgan Housel

Morgan Housel is a partner at Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers.

He is also the winner of the New York Times Sidney Award and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. Houzel has presented at more than 100 conferences in a dozen countries.

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StoryShot #1: We All Have Unique Experiences of Investing

Our current relationships with money are based on our past experiences. Housel uses the example of people who struggled during the Great Recession that started in 2007, and are now scared of reinvesting. 

We shouldn’t judge others for their financial decisions. We have all simply had different experiences of investing. We must learn to make investment decisions based on our goals and investment options rather than experiences.

The world is always changing. Relying on your experiences means you’re basing your decisions on knowledge of a different world.

StoryShot #2: Bill Gates Had a Competitive Advantage

Luck and risk are an integral part of finance. Do not assume that individual effort alone will allow you or others to be successful. Take Bill Gates. He is highly talented and works extremely hard. But, he also had a competitive advantage because he attended one of the few high schools in the world at that time to own a computer.

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There are infinite moving parts within the world. The accidental impact of actions outside your control often has a greater effect than your conscious decisions. So, work hard and take risks but also consider the role that luck plays in finance.

This should also help you develop greater humility when things are going right and compassion when they are going wrong.

StoryShot #3: Rich People Are More Likely to Make Crazy Decisions

Rich people often make illogical financial decisions. The goalposts seem to move the more you earn. Countless rich individuals have lost everything because they felt the millions they had were not enough.

Learn from these failures by not risking what you have and need for what you don’t have and don’t need. Saying “enough” is realizing that an appetite for more will push you to the point of regret.

StoryShot #4: Warren Buffett Is a Prime Example of the Power of Compound Interest

Compound interest can bring you financial freedom. That said, the human brain struggles to understand the power of compounding.

Warren Buffett is a good example of compound interest in action. Many believe his wealth is entirely due to his knowledge of sound investments, as he has been making good investments since a young age. But compound interest plays a huge part.

His current net worth is $84.5 billion, but he accumulated $84.2 billion after his 50th birthday. This shows the power of compounding. The key to compounding isn’t about earning the highest returns. You want pretty good returns that you can stick with for the longest period.

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StoryShot #5: Good Investing Is About Not Screwing Up

Effective investing is less about making sound decisions and more about consistently not making mistakes. Financial success can be summarized by one word: survival. The most financially successful are those who have been able to stick around for a long time. You can only grow your wealth if you have given an asset time to compound.

Getting money requires risk-taking, optimism, and putting yourself out there. Keeping money requires the opposite: humility. Try to make yourself financially unbreakable rather than focusing on big returns.

Humility is also about planning with the expectation things won’t go according to plan. This is your margin of safety and is one of the most underappreciated forces in finance.

Here are a few examples of ways you can start establishing a margin of safety:

• Frugal budget – When your income increases, still try to live below your means.
• Flexible thinking – Be willing to accept new information and ideas about investing as technology and ideas develop.
• Loose timeline – Avoid ditching investments impulsively if they drop in price. If you start with a loose timeline, you are better able to ride the downswings and benefit from the upswings.

StoryShot #6: Do the Average

The most successful, rich, and famous people are there because of a one-in-a-million event. As most of our attention goes toward these huge events, it can be easy to forget their rarity. Try to avoid underestimating how rare and powerful these events are.

Investors can be wrong half the time and still make a fortune. An investing genius is someone who can do the average thing when all those around them are making rash decisions.

StoryShot #7: People Believe Wealth Will Make Them Popular

Consider the Rich Man in the Car Paradox. If we see a nice car, we may daydream about having that car and everyone thinking we’re cool. The paradox is that we’re not thinking about the driver of the nice car we spotted, yet we believe that if we had such a car, everyone would be thinking about us.

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We can apply this more broadly to wealth. People acquire wealth because they believe it will make them liked and admired. But others just use wealth as a benchmark for their desire to be liked and admired.

StoryShot #8: Stop Judging People By Their Visible Wealth

Some people use newfound wealth as an opportunity to show off. We should stop judging people’s wealth by what we see. Those who decide not to buy something now and to buy something later will stay wealthy for longer.

Being rich is based on current income, while your wealth is hidden and is the income that isn’t spent. Wealth’s value lies in offering you options, flexibility, and growth to one day purchase more stuff than you can right now.

Rating

We rate The Psychology of Money 4.5/5.

How would you rate Morgan Housel’s book based on this summary?

Infographic

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The Psychology of Money PDF, Free Audiobook, and Animated Summary

This was the tip of the iceberg. To dive into the details of The Psychology of Money and support Morgan Housel, order the book or get the audiobook for free on Amazon.

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Editor’s Note

This piece was first published in 2021. It was carefully revised and updated in January 2024.

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