The Psychology of Money

by Morgan Housel

To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism.

The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.

Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

not all success is due to hard work, and not all poverty is due to laziness.

focus less on specific individuals and case studies and more on broad patterns.

There is no reason to risk what you have and need for what you don’t have and don’t need.

The hardest financial skill is getting the goalpost to stop moving.

Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.

The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you.

Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.

Destruction in the face of progress is not only possible, but an efficient way to get rid of excess.

The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

doing something you love on a schedule you can’t control can feel the same as doing something you hate.

Wealth is financial assets that haven’t yet been converted into the stuff you see.

The world grew its “energy wealth” not by increasing the energy it had, but by decreasing the energy it needed.

Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.

Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.

My own theory is that, in the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night.

Few things stay the same for very long, which means we can’t treat historians as prophets.

For my own investments, which I’ll describe more in chapter 20, I assume the future returns I’ll earn in my lifetime will be ⅓ lower than the historic average. So I save more than I would if I assumed the future will resemble the past. It’s my margin of safety.

The ability to do what you want, when you want, for as long as you want, has an infinite ROI.

You can plan for every risk except the things that are too crazy to cross your mind. And those crazy things can do the most harm, because they happen more often than you think and you have no plan for how to deal with them.

the most important part of every plan is planning on your plan not going according to plan.

Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum.

Most things are harder in practice than they are in theory. Sometimes this is because we’re overconfident. More often it’s because we’re not good at identifying what the price of success is, which prevents us from being able to pay it.

Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.

Assuming that something ugly will stay ugly is an easy forecast to make.

Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.

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.

Incentives are a powerful motivator, and we should always remember how they influence our own financial goals and outlooks. It can’t be overstated: there is no greater force in finance than room for error, and the higher the stakes, the wider it should be.

The illusion of control is more persuasive than the reality of uncertainty.

Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.”

History is just one damned thing after another.