The Psychology of Money Analysis – Introduction

The Psychology of Money by Morgan Housel has been a groundbreaking book about money and has inspired many people to do better with money. In a traditional sense, this book isn’t about tricks to earn money, but about doing well with money.

In this post, I attempt to dissect and analyze the concepts Housel explains in the introduction chapter of the book.

Behaviour Matters

Success with money has got a lot to do with one’s behaviour.

This is one of central tenets of the Psychology of Money and this is one of the first concepts introduced in the book.

Housel gives the example of Ronald James Read, who amassed a wealth of $8 million dollars by the time he died in 2014. According to estimates, 2.8 million people died that year out of which only 4000 were millionaires. Ronald Read was one of the millionaires despite having worked as a janitor for most of his professional life.

This was in stark contrast to the example of Richard Fuscone, a Harvard-educated investment banker, who lost most of his wealth at a very young age by taking some wild and unnecessary risks.

Basically, the intention of these two varied stories is to demonstrate that typical smartness does not guarantee how well a person will do with money. This goes against our basic understanding of the way education works. In fact, finance is the only field where it is possible that a janitor ends up having more wealth than an ivy-league educated finance professional.

What is the reason for this paradox?

According to Housel, one reason is that financial outcomes are driven by luck, independent of intelligence and effort on the part of the individual. Second, financial success is not a hard-science. For all purposes, it is a soft-skill where behaviour is more important. In other words, what happens in your head determines what happens to your money.

In my view, the point about the role of behaviour in achieving success with money is spot on. However, I do not agree with the examples as much I would like to.

Definitely, Ronald Read may have managed to amass the wealth through frugal investing and keeping a conservative behaviour, it does not always work. More often than not, these cases are also a by-product of knowing less. If you read more about Ronald Read, you’ll find out that he owned almost 95 stocks. It’s not exactly a case of good behaviour as much as the result of leading a frugal life and investing everything he could in all the companies that he possibly can.

The Lens of Psychology, Greed and History

Moving on, Housel points that the two most important things in life are money and health.

Over the years, with study and advancement, the health-care services have progressed a lot. In general, it has managed to make people more healthy. However, the same cannot be said about money despite a similarly amazing progress made by the finance industry.

Probably, the sharpest brains are employed in the financial sector. However, it has caused little impact in making people better at handling money.

A glaring example of this anomaly was witnessed during the 2008 financial crisis. Despite the availability of so much information, even experienced economists found it tough to explain the reasons for the crisis. On the contrary, so many opinions and theories emerged that it ultimately made things even more complicated to understand.

Here, Housel make the second big point of the chapter.

According to him, a better way to look at the financial crisis may have been using the lens of psychology, greed and history.

The famous French writer Voltaire had said : History does not repeat itself. Man always does.

To understand why people get buried in debt, we need to understand the history of human greed, needless insecurity and unfounded optimism. All of these are rather abstract topics and cannot be quantified mathematically.

However, that is precisely the problem. We are typically taught about money too much like physics or maths (rule-based) rather than psychology-based (emotions). Ultimately, this approach fails. This is because physics is guided by rigid laws, but finance is guided by behaviour.

Again, I would say Housel makes some very valid points, especially the one about the improvement in health-care services and not the same improvement in financial knowledge. The points hold well on a superficial level.

However, if you think deeply, people have their doubts on the improvement in health-care services. In general, we are better off than 100 years ago but the recent Covid-crisis has also exposed huge gaps in the health-care situation of the world.

Nevertheless, the idea about finance being a product of psychology and human greed or fear is extremely relevant. However, one might argue that there is a separation here. The concepts of economics is one thing and how people manage their money is another. The same could be said about health. Knowledge about nutrition is one thing, but how people manage their bodies is another.

My point is that many important things in life actually depend on the behaviour of people. Not just finance.

Conclusion

Just reading the introduction chapter of the Psychology of Money definitely builds my interest to read further. The book is a breezy read and Housel has tried to make the stories as interesting as possible.

However, some examples are not that deep or profound unless you are a novice in handling money. Of course, this is just the introduction and things may become more complex in the upcoming chapters.

Have you read the Psychology of Money? If yes, what are your thoughts about it?

If you haven’t read it and are planning to, what do you expect to get out of it?

Do write your views in the comments section below.

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