Hello friends, in today’s article, we see the book summary of the book the psychology of money. this book is one of the best books to understand the money concept, and how we think about money. this book is written by Morgan Housel. friends, this is one of my all-time favorite books on money.
so let’s start book summary.
The Psychology of Money:- Morgan Housel book summary
this book explains personal finance through the lens of Human Behaviour. Many personal finance books focus on things like how the stock market works. How to select stocks or build a portfolio etc.
The author of this book is only focused on the relationship between people and money.
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 optimum.
doing well with money has little to do with how smart you are and a lot to do with how you behave. Engage in the right behaviors and you are likely to succeed in life.
Similarly, no amount of intelligence, survey, or inside information will save you from the wrong set of behaviors.
In this book, each of the chapters explores individual human behavior or attitudes towards money. Certain behaviors, induce positive outcomes, while others guarantee failure.
this book is divided into multiple chapters and some lessons caution us against certain behaviors another lesson, encourages us to embrace beneficial habits. (The Psychology of Money:- Book summary)
the beauty of these lessons is that they are accessible to anyone. they are not the sole domain of high-income earners or those with an elite education degree.
Reading this book will improve your relationship with money and your attitude regarding personal finance. It isn’t difficult the author assures us financial wealth, just requires discipline, patience, and a handful of constructive behavior.
Let’s understand the 12 most important lessons from this book in detail.
Lesson 1:- No One is Crazy (the Psychology of Money:- Book summary)
In this chapter, the author says, ” Everyone has a unique idea of how the world works. this worldview is influenced by a unique set of circumstances, valves, and external influences.
Your personal experience with money makes up maybe 0.000001% of what happened in the world, but maybe 80% of how you think the world works.
No amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty. We all think we know how the world works.
But we’ve all only experienced a tiny silver of it. Consider people most likely to purchase lottery tickets in the US, low-income households who spend on an average $400/year on lottery tickets.
This number seems crazy to people in higher-income households. But some might justify the purchase by saying they are paying for hope and a dream, without being in their shoes. (the Psychology of Money:- Book summary)
It’s hard to fully appreciate why they behave, the way they do.
so everyone lives, as much as they know the psychology of money, those know the whole game of money they make lots of money. those who don’t know the money game, always stay in the debt.
it’s not crazy, it’s just about the understanding of the psychology of money.
let’s see the second lesson.
Lesson 2:- Luck and Risk (the psychology of money)
in this chapter author explain the luck and risk concept regarding money
the author says, ” The outcomes are determined by more than efforts. Luck and Risk often figure prominently in individual outcomes.
let’s see the example of bill gates regarding luck and risk
Bill Gates, attended one of the only high schools in the world that had a computer in 1968. were it not for the efforts of a teacher, bill, Dougall to produce a $3000 teletype computer
It’s is unlikely that Bill Gates would enjoy the same career success. Bill Gates himself admits about the lakeside( high school) and says, ” if there had been no lakeside ( high school), there would have been no Microsoft.”
At the lakeside, there were three standout computer students ( all friends): Bill Gates, Paul Allen, and kent Evens.
Kent Evans was destined for success but met an untimely death in an accident before his graduation. this is used as an example of bad luck. (the Psychology of Money:- Book summary)
Luck and risk are both the reality, that every outcome in life is guided by forces other than individual effort. These both things happen.
The world is too complex to allow 100% of your actions to dictate 100% of your outcomes. the accidental impact of actions outside of your control can be more impactful.
now, let’s see lesson 3
Lesson 3:- Never enough
in this chapter, the author give the story of two writers
the author says, ” this story is about writers Kurt Vonnegut and Joseph heller. both were attending a party hosted by a billionaire. Vonnegut says, that “the billionaire makes more money in a single day than heller, who made money from his popular novel.”
Heller says, ” Yess but I have some things he will never have. i.e. enough.
then the author says, ” there is no reason to take risk what you have. the hardest financial skill is getting the goal post to stop moving. comparing ourselves to others is often the culprit.
Capitalism is good at generating both wealth and envy. but in social comparison is a process without end.
so you don’t have to compare yourself with others, because, there’s always someone higher up on the ladder. Enough means you know when to avoid doing something you will regret later.
Many things are not worth the risk, regardless of the gains, like Reputation, Freedom, Family and friends, love, happiness. this thing is not worth for risk. (the Psychology of Money:- Book summary)
The only way to win is to refrain from playing the game.
Lesson 4:- Confounding Compounding
in this chapter the author explains the compounding effect, with the greatest Investor example, i.e. Warren Buffett
The simplest fact about warren Buffett’s fortune is he wasn’t just a good investor. he was a good investor for 75 + years
” Effectively all of warren Buffett’s financial success can be tied to the financial base. He built in pubescent years and the longevity he maintained in his geriatric years.”
His skill is investing, but his secret of success is time. Good investing isn’t necessarily about the highest returns….it’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.
That’s where the compounding shows its magic.
Lesson 5:- Getting wealthy v/s Staying Wealthy
Getting money and keeping money both are entirely different things and require entirely different mindsets and strategies.
Getting money requires taking risks, being optimistic, and putting yourself out there. keeping money requires the opposite… it requires humility, and fear that you’re made can be taken away from you just as fast.
then the author gives the example of venture capitalist
Micheal Moritz ( Venture Capitalist):- We assume that tomorrow won’t be like yesterday. we can’t afford to rest on our laurels. we can’t be complacent. (the Psychology of Money:- Book summary)
We can’t assume that yesterday’s success translates into tomorrow’s good fortune. Having a ” Survival mindset” requires three things
- Aim to be financially unbreakable
- Be able to stick out swings in the market
- Stay in the game long enough for compounding to work its magic.
the most important thing to plan is the plant won’t go according to plan.
A Good plan leaves room for error. the more you need specific elements of a plan to be true, the more fragile your financial plan becomes.
Be optimistic about the future but paranoid about the obstacles to your success.
Lesson 6:- Tails, you win
In this chapter, we see the story of the art collector Heinz Berggruen.
he amassed an amazing collection of Picasso’s, Braques, Klees, and Matisses
people were amazed by his art investing acumen. but the reality was that he bought massive quantities of art. only a subset of his collection was valuable.
” Berggruen could be wrong most of the time and still end up stupendously right. anything that is huge, profitable, famous, or influential is the result of a tail event an outlying one-in-thousand or millions event.
Now we talk about a venture capital model:- if a fund makes 100 investments, they expect 80% to fail. a handful to do reasonably well and 1-2 to drive the fund’s returns.
Considering the distribution of winners and losers in the stock market most public companies fail. a few do ok, and a few generate extraordinary returns. (the Psychology of Money:- Book summary)
when you accept that tails drive everything in business, investing, and finance you realize that it’s normal for lots of things to go wrong, break, fail, and fail.
Lesson 7:- Wealth is what you don’t see
Wealth is financial assets that haven’t yet been converted into the stuff you see. the author reminds us that when people say they want to be millionaires.
What it really means, is that they want to spend a million dollars. Spending a million dollars is ” literally the opposite of being a millionaire.”
The difference between wealthy and rishis people who live in big homes and drive fancy cars are rich. people with big incomes are rich.
They display the fact that they are rich.
Wealth is hidden
Wealth is optionality, flexibility, and growth. Wealth is the ability to purchase stuff if you needed to.
Lesson 8:- Save money
in this chapter, the author explains, three types of people, according to save money
- Those who save money
- Those who don’t think they can save
- those who don’t think they need to save.
your savings rate is more important than your income or investment returns. Don’t worry about what other people think or feel.
having more control over your time and options is becoming one of the most valuable currencies in the world.
Lesson 9:- Reasonable > rational and room for error
in this chapter author give some advice regarding aim ( goal)
the author says, ‘ do not aim to be coldly rational when making financial decisions. Aiming 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. (the Psychology of Money:- Book summary)
Scott Sagan ( Political Scientist) says, ” Things that have never happened before happen all the time.”
Remember:- past performance is not an indication of future results.
Blackjack and Poker players know they are dealing with probabilities, not certainties. the best plan is to plan for things to not go according to plan.
The margin of Safety- You can also call it room for error or redundancy. it is the only effective way to safely navigate a world that is governed by ads, not certainties.
it is impossible to prepare for and anticipate what you can not envision. so what you could do. what you can do is minimize the impact of failure by avoiding single points of failure.
The biggest single point of failure is with money is a sole reliance on a paycheck to fund short-term spending needs. that too with no savings.
Rainy day funds are a good idea; save for things you can not anticipate or predict.
Lesson 10:- You’ll change
in this chapter explain, our needs, our purpose is change over time.
the author says, ” we are terrible predictors of our future selves. our present needs, wants are not the same as our future needs, wants.
Thinking about long-term plans and decision-making is very difficult to do effectively. Accept the reality that individuals are prone to change.
What matters to you today, may be viewed as inconsequential in a decade.
then author explains Sunk Cost bias
Sunk Costs:- is anchoring decisions to past efforts that can’t be refunded. people are a devil in a word, where people change over time. (the Psychology of Money:- Book summary)
They make our future selves prisoners of our past. it’s the equivalent of a stranger making major life decisions for you. like you invested in a business and failed horribly but now you are thinking to keep it continue because you have already lost a lot of money, in it.
Without considering that this might not necessarily go well in your favor. What is gone is sunk cost, what is important is to save ourselves from future losses.
The key to a lot of things with money is just figuring out what that price is and being willing to pay it. Successful investing demands a price. but its currency is not dollars and cents.
it’s volatility, fear, doubt, uncertainty, and regrets all of which are easy to overlook. you’re dealing with them in real-time. few investors have the disposition to say, I’m actually fine if I lose 20% of my money. but if your point of view volatility as a fee, things look different.
When you invest in the long term. then you need to be willing to accept the short-term price of market fluctuations.
Lesson 11:- The seduction of Pessimism
Pessimism isn’t just more common than optimism, it also sounds smarter. it’s intellectually captivating and it’s paid more attention than optimism.
Which is often viewed as being oblivious to risk telling someone, they’re in danger and you have their undivided attention.
Daniel Kahneman says, ” this asymmetry between the power of positive and negative expectation or experiences has an evolutionary history.
Organisms treat as more urgent than opportunities have a better chance of surviving and reproducing.
In 2000, oil prices increased certain types of oil extraction become economically feasible. Necessity is the mother of all inventions and humanity is endlessly innovative. (the Psychology of Money:- Book summary)
people respond to adversity and problems with new and novel solutions. treat incentivize in equal magnitude. that’s a common plot of economic history that is too easily forgotten by pessimists.
progress is slow, but setbacks and disasters happen quickly and impactfully. there are lots of overnight tragedies, there are rarely overnight miracles.
Growth is driven by compounding, which always takes time. Distraction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instance.
Lesson 12:- Confessions
In this less, the author highlights, his own investment, finance behaviors, and beliefs on money.
the author says, ” independence drives all financial decisions. Live below your means. exercise, reading, podcast, learning, own house without a mortgage.”
the author admits that this is a terrible financial decision, but a great money decision because of peace of mind.
the author puts 20% of his assets in cash ( outside of the value of his primary home.)
he does this to maintain a safety net. and to avoid being forced to sell his stock market investments in an emergency.
the worldwide famous Investing thinker ( Charlie Munger) says, ” the first rule of compounding is never interrupted unnecessarily.
the author no longer invests in individual stocks. all the author’s stock market investments are in low-cost index funds.
some people can outperform the markets averages. it’s just very hard and harder than most people think. Every investor should pick a strategy that has the highest odds of successfully meeting their goals. (The Psychology of Money:- Book summary)
For most investors, a low-cost index fund will provide the highest odds of long-term success.
so, friends, there are the 12 lessons from the book, the psychology of money.
there are other 8 lessons remaining, you can read this in the book, buy this book from the following link.
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