Synopsis of the Book
The Psychology of Money, written by Morgan Housel, published in 2020, could be categorised under Psychology, Finance, and Nonfiction. The author wrote an article three years ago which got a lot of traffic hence decided to write a book out of it. Last year I saw that the book was recommended by many folks in my network and on Twitter. All of the recommenders were highly impressed by the book and spoke intensely of it. Now that I have finished it, I can understand why!
The premise of this book is that 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.
One, financial outcomes are driven by luck, independent of intelligence and effort. That’s true to some extent, and this book will discuss it in further detail. Or, two (and I think more common), that financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.
It is a perfect coffee table book, where concepts are explained backed by stories and chapters that are not related, so you can read it in any order. I would recommend the book to anyone and everyone. It’s an effortless read for everyone to understand. The stories make the inferences relatable with one’s personal experiences. The insights are explained concisely that make a profound impact on you. The book tries to give you mental models on how to remain unperturbed in unfavourable situations, defining your goals, taking future changes into account, etc.
Takeaways from the book
NOTE: I recommend you go ahead and read to book to understand the stories and detailed inferences behind the following points.
- Everyone’s experience with money is different, so never compare somebody else’s financial decisions with yours.
- In any financial success or failures, one’s input (efforts) are not the only contributing factor. Luck or unluck also plays their role.
- Excess greed will only cause harm, even if it is a great moving force. This reminded me of an old Sanskrit maxim: “अति सर्वत्र वर्जते”. Anything in excess should be avoided.
- Not everyone can comprehend the power of compounding. That’s why many are just surprised by the numbers of compounding when they first encounter it. But do not employ compounding for their benefit.
- Starting early and being consistent is the key to gaining a lot in the long term with compounding at play.
- Gaining money and keeping it around are two different things.
- The 80 - 20 principle at work here, concerning returns. The 20% will generate 80% of the returns.
- Money can buy you the financial freedom to do whatever you want. It will allow you to retire early (or whenever you like) and do whatever it is that you have always wanted to pursue.
- People who show off their riches may not necessarily be wealthy.
- Decisions made based on a spreadsheet may be rational but may not seem reasonable. Always aim for reasonable it may help you sleep better.
- Investing is not pure science since humans are involved in decision making which makes outcomes challenging to predict. Humans have feelings, and they make decisions based on their situations. Hence, the historical performance should not be the only parameter for investing decisions.
- Avoid a single point of failure by not putting all eggs in a single basket. This provides you with a margin of safety. When you receive an economic blow in one area, you still have enough fuel to move forward.
- Nothing is free in this world. Similarly, investing comes with the risk of losing money. If you lose some money in the short term, look at it as a price instead of loss or fine.
- Everyone has different investing goals, so don’t take generic tips from people who don’t know your investment goals.
- Pessimism can keep you alive in the game, but the optimists win the game in the long run.