The Psychology of Money

by Morgan Housel

financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. I call this soft skill the psychology of money.

It’s that knowing what to do tells you nothing about what happens in your head when you try to do it.

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort.

The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

The line between bold and reckless can be thin. When we don’t give risk and luck their proper billing it’s often invisible.

At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.”

To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish. It is just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense.

If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort.

It gets dangerous when the taste of having more—more money, more power, more prestige— increases ambition faster than satisfaction.

But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.

Whatever it is, the inability to deny a potential dollar will eventually catch up to you.

But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

frugal budget, flexible thinking, and a loose timeline— anything that lets you live happily with a range of outcomes.

Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery. And in fact you know it will be filled with misery. You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive.

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

A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.

Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.

Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.

higher cancel rate overall.

The good jokes I see on Netflix are the tails that stuck out of a universe of hundreds of attempts.

When we pay special attention to a role model’s successes we overlook that their gains came from a small percent of their actions. That makes our own failures, losses, and setbacks feel like we’re doing something wrong. But it’s possible we are wrong, or just sort of right, just as often as the masters are. They may have been more right when they were right, but they could have been wrong just as often as you.

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.

Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.

More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.

Money’s greatest intrinsic value—and this can’t be overstated— is its ability to give you control over your time. To obtain, bit by bit, a level of independence and autonomy that comes from unspent assets that give you g...

People like to feel like they’re in control—in the drivers’ seat. When we try to get them to do something, they feel disempowered. Rather than feeling like they made the choice, they feel like we made it for them. So they say no or do something else, even when they might have originally been happy to go along.

A wise old owl lived in an oak, The more he saw the less he spoke, The less he spoke, the more he heard, Why aren’t we all like that wise old bird?

Compared to generations prior, control over your time has diminished. And since controlling your time is such a key happiness influencer, we shouldn’t be surprised that people don’t feel much happier even though we are, on average, richer than ever.

Take it from those who have lived through everything: Controlling your time is the highest dividend money pays.

It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine.

Humility, kindness, and empathy will bring you more respect than horsepower ever will.

MONEY HAS MANY ironies. Here’s an important one: Wealth is what you don’t see.

Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car (or $100,000 more in debt). That’s all you know about them.

Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

Investor Bill Mann once wrote: “There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have. It’s really that simple.”

Wealth is turning down that treat meal and actually burning net calories.

It’s hard, and requires self-control. But it creates a gap between what you could do and what you choose to do that accrues to you over time.

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.

Learning to be happy with less money creates a gap between what you have and what you want—similar to the gap you get from growing your paycheck, but easier and more in your control.

spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money.

Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.

When you define savings as the gap between your ego and your income you realize why many people with ...

Having more control over your time and options is becoming one of the most valuable currencies in the world. That’s why more people can, and more people should, save money.

Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.

investing is not a hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy and paranoid.

The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.

“the purpose of the margin of safety is to render the forecast unnecessary.”

Graham’s margin of safety is a simple suggestion that we don’t need to view the world in front of us as black or white, predictable or a crapshoot. The grey area—pursuing things where a range of potential outcomes are acceptable—is the smart way to proceed.