The Psychology of Money

by Morgan Housel

doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.

A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.

I have no first-hand knowledge of the Depression. My family had one of the great fortunes of the world and it was worth more than ever then. We had bigger houses, more servants, we traveled more. About the only thing that I saw directly was when my father hired some extra gardeners just to give them a job so they could eat. I really did not learn about the Depression until I read about it at Harvard.

We all think we know how the world works. But we’ve all only experienced a tiny sliver of it.

“To rephrase an old saying: everyone talks about retirement, but apparently very few do anything about it.”6

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side.

Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.

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

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.

“Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.”

Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

If you think that’s a big failure, we’re working on much bigger failures right now. I am not kidding. Some of them are going to make the Fire Phone look like a tiny little blip.

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.

Modern capitalism makes helping people fake it until they make it a cherished industry. But the truth is that wealth is what you don’t see.

“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.”31

Past a certain level of income, what you need is just what sits below your ego.

History is littered with good ideas taken too far, which are indistinguishable from bad ideas.

Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error.

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

“Every job looks easy when you’re not the one doing it.”

You can say a lot about these investors. You can call them speculators. You can call them irresponsible. You can shake your head at their willingness to take huge risks. But I don’t think you can call all of them irrational.

“I am not an optimist. I am a very serious possibilist.”

Chin up, everyone. Within our lifetime our economy will grow to almost 15 times the size it was before the end of the war. Our life expectancy will nearly double. Our stock market will produce returns like any country in history has rarely seen. We will go more than 40 years without ever seeing unemployment top 6%. We will become a world leader in electronic innovation and corporate managerial systems. Before long we will be so rich that we will own some of the most prized real estate in the United States. Americans, by the way, will be our closest ally and will try to copy our economic insights.

One is that money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.

Another is that pessimists often extrapolate present trends without accounting for how markets adapt.

There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.

A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore.

The Washington Post wrote in 1909: “There will never be such a thing as commercial aerial freighters. Freight will continue to drag its slow weight across the patient earth.” The first cargo plane took off five months later.

Expecting things to be bad is the best way to be pleasantly surprised when they’re not. Which, ironically, is something to be optimistic about.

“When you have no money, and your son is sick, you’ll believe anything.”

Chronicling the Great Plague of London, Daniel Defoe wrote in 1722: The people were more addicted to prophecies and astrological conjurations, dreams, and old wives’ tales than ever they were before or since … almanacs frighted them terribly … the posts of houses and corners of streets were plastered over with doctors’ bills and papers of ignorant fellows, quacking and inviting the people to come to them for remedies, which was generally set off with such flourishes as these: ‘Infallible preventive pills against the plague.’ ‘Neverfailing preservatives against the infection.’ ‘Sovereign cordials against the corruption of the air.’

Well are things better now ?

Medicine is a complex profession and the interactions between physicians and patients are also complex.” You know what profession is the same? Financial advice.

Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong. Because it’s never as good or as bad as it looks. The world is big and complex. Luck and risk are both real and hard to identify. Do so when judging both yourself and others.

Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.

Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.

Half of all U.S. mutual fund portfolio managers do not invest a cent of their own money in their funds, according to Morningstar.69 This might seem atrocious, and surely the statistic uncovers some hypocrisy.

important financial decisions are not made in spreadsheets or in textbooks. They are made at the dinner table. They often aren’t made with the intention of maximizing returns, but minimizing the chance of disappointing a spouse or child. Those kinds of things are difficult to summarize in charts or formulas, and they vary widely from person to person. What works for one person may not work for another. You have to find what works for you. Here’s what works for me.

The economy works better for some people than others. Success isn’t as meritocratic as it used to be and, when success is granted, it’s rewarded with higher gains than in previous eras.