Although The Psychology of Money wasn’t on my list of books to read as part of my personal finance resolutions for 2021, I have heard so many great things about this book that I thought I would give it a read. Here’s my Psychology of Money book review.
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I follow Morgan Housel on Twitter and it is natural progression to read his book, of course. As of November 2021, he has sold over 1 million copies worldwide (this is a very impressive accomplisment).
Psychology of MOney Book Review
Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel is a book about the gap between our knowledge about money and our behaviour. It is just fascinating. This book is a collection of 20 lessons on money, investing, and human behaviour. Each chapter is an easy short read but like a thriller novel, the last paragraph prompts you to want to read the next chapter.
The premise of Psychology of Money is that behaviour is hard to teach, even to smart people.
Finance is math-based and there are spreadsheets and formulas to tell us what to do and how to optimize things, but most people don’t make financial decisions based on a spreadsheet.
Our worldview and personal history is embedded in our decision making and naturally colours how we view the world. Thus if affects how we make our financial decisions.
We change our behaviour based on stories, based on what we read, and based on being influenced by others (and as I’ve learned over the years, you can’t change others behaviours, they have to do it for themselves). Some of the lessons he shares in his book might make you want to change your behaviour.
Who is MOrgan Housel?
Morgan Housel is a partner at the Collaborative Fund (it is an investment firm based on growing creativity and the collaborative economy). He used to be a columnist at The Wall Street Journal and The Motley Fool and is considered an expert on behavioural finance.
Behavioural finance is an ‘up and coming’ field which combines psychology and money. Another author on behavioural finance is Daniel Kahnehman, who wrote Thinking Fast and Slow. Yet another researcher on behavioural finance is Dan Ariely.
What I Liked About Psychology of Money
I can see why everyone is raving about this book. The first few chapters in, I was a converted fan.
First off, he shares some of the events that have occurred throughout history and how they may have influenced some of the investing behaviours of people who have gone through those experiences. I hadn’t thought of that to this extent.
When I think of this, I think of the differences between boomers and millennials and how our own unique experiences have shaped how we behave today with money. These behaviours are so etched from our upbringing and experiences that it’s difficult to change (or even be aware of how it influences our behaviours).
In another chapter, he talks about having a survival mindset. Personal finance math tells us that staying invested 100% is the optimal way to invest. Staying invested means, that when you have cash, invest it. Don’t leave a cash stockpile. You’ll come out of the other end with more money if you stay invested instead of earning 1% on your cash.
People criticize Warren Buffett for having such a large cash stockpile in Berkshire Hathaway, they say “he’s lost his touch” or he doesn’t have to aim for high returns anymore, or that he’s just coasting.
However, if that cash prevents you from having to sell your investments during the bear market, then you’ve come out ahead.
During the March 2020 blip in the markets and the circuit breaker days, I remember thinking how lucky I was to have cash on hand. Even if the math shows that I would have been better with the money invested 100%, I don’t think I could stomach that volatility.
I choose the option that lets me sleep at night.
Another lesson he shares is about “Tails”. When we think of successful businesses we only see the success. We don’t see the failures (or don’t remember them).
Did you remember the Amazon Fire Phone? Morgan Housel writes that it’s okay for Amazon to lose a ton of money on something like the Fire Phone because that loss was offset by the major success of something like Amazon Web Services (a tail).
In the last chapter “the culmination chapter” he reveals how he invests his own money.
Instead of trying to beat the market, he practises what he preaches and dollar cost averages (yes that’s right he invests money regularly and doesn’t try to time the market) into a low cost (I think Vanguard) index fund.
Also, he paid off his mortgage in a low interest rate environment even though he could have used that money to invest instead.
The rational investor would do otherwise, but as he mentions, human beings are not always rational.
What I Didn’t Like About Psychology of Money
What did I not like about Psychology of Money? Maybe that it was too short, or the chapters were a bit too short and I would have liked the examples and stories to go into more detail. That’s not much of a ‘complaint’ though. I just loved the examples he gave and the stories he shared.
I highly highly recommend this book if you are interested in learning more about money and why there’s a divide between what we KNOW we should do and what LOGIC tells us to do (for example, use money to invest instead of paying down your mortgage) and what we actually do because we are humans and not actually robots, and are wired a certain way.
This book has influenced me to increase my cash stockpile to at least 20% just like he has, once I reach my investment portfolio goal.
I’ll end with a great quote from the book that really resonated with me:
“Doing something you love on a schedule you can’t control can feel like you’re doing something you hate”
— Morgan Housel
Ultimately building wealth is about building freedom to do what you wish with your time and having the control of how you want to spend your time.
Are you spending your time accordingly?
Have you read Psychology of Money?
What’s Your Psychology of Money Book Review?
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GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.
Sounds like a good book, and I’m going to add it to my reading list.
A friend of mine from university has released a couple of CDs (we were in a music program) and one of my favourite songs of hers is called “Time Is How You Spend Your Love”. She didn’t pen the original quote, but that notion really resonates with me, and I try to think of this quote / song whenever I feel like my wheels are spinning.
I also saw the Twitter dividend drama and was not overly impressed with some of the participants.
@James R- Thanks for sharing, I like that title. Time is how you spend your love, very true especially when we all have the same amount of time per day as everyone else. Yeah the Twitter drama was a bit trollish, IMO.