Compared to the other offerings on our list, The Psychology of Money by Morgan Housel is a far more recent publication. Published just a few months shy of the pandemic, The Psychology of Money offers new insight on the apparent irrationalities of the stock market and common money fallacies to which we are all susceptible. Does The Psychology of Money offer up new observations in an already oversaturated field? Or does it again retread ground that were better charted and better presented by past writers?

The long and short of it:

The Psychology of Money is divided into 20 individual chapters that can be read together or in isolation. Some of these chapters repeat familiar wisdoms, others offer new advice. I have selected 7 chapters from The Psychology of Money that I personally felt were both unique and uniquely enlightening.

Chapter 1. No one’s crazy

Everyone experiences life differently. People who lived through the Great Depression will behave in ways that seem outright crazy to people who did not. They may be paranoid of investing in stocks, only putting their money in US Treasury bonds and gold. Contrastingly, those who grew up in the care of affluent parents would run up their credit cards in a way that people with frugal parents would find utterly bizarre. It’s been found that what the stock market did in an individual’s formative years (in this case, teenage and young adulthood) will go on to inform their attitude towards the stock market for the rest of their lives.

Chapter 2. Luck & Risk

Housel points to Bill Gates as an example of a very smart and very lucky individual — Gates went to Lakeside High School, the only high school with a Teletype Model 30 computer, the most advanced in the world at the time. There can be no doubt that Bill Gates’ luck in going to Lakeside coupled with his inherent talent with computers formed the bedrock of his future success. Think of the many Bill Gates of the world who were not at the right time and place and thus never achieved even a fraction of the success they otherwise might’ve. The flip side of luck is risk. Frequently, people make choices that have the equal likelihood of fabulous wealth and utter destitution. The only thing separating success and failure is sheer happenstance; factors on a societal and global scale that are beyond any individual’s control. Success is far more complicated than the linear cause-and-effect stories we’re accustomed to.

Chapter 6. Tails, You Win

Success is driven by tails. Big mutual funds regularly find that in the long term, out of 100 companies they invest in, 80% will fail, 15% will do reasonably well, and 5% will go on to dominate the market and utterly redefine our way of life. When Warren Buffet first purchased Apple stocks in 2016, it accounted for 6% of Berkshire Hathaway. Today Apple stocks make up over 46% of Berkshire Hathaway’s total equity portfolio. We have to go into investing with the understanding that we’ll probably be wrong more than 50% of the time, but that’s okay as long as when we’re right, we’re really right.

Chapter 9. Wealth is What You Don’t See

People who earn a lot of money are rich. People who have a lot of money are wealthy. Someone who is rich is not necessarily wealthy and vice versa. Generally speaking, the rich are much easier to spot than the wealthy. This makes sense — people who spend money on a Porsche, and a mansion in Beverly Hills with a pool in the back obviously have a lot of money to spend, but we can’t see the numbers on someone’s bank account. However, people who spend money on things will have things, not money. To have money is to save more of it than you spend, and this is something only behavior can determine, not income or value of possessions.

Chapter 11. Reasonable > Rational

When analyzing whether or not a financial decision is correct, we tend to fall back on the rhetoric of rationality. In a cold measurement of pros and cons, do the advantages outweigh the disadvantages? However, people are not emotionless logic machines, we have responsibilities, we have hopes and dreams and fears. It would be rational to assume that the US stock market will continue it’s historic upwards trajectory even in the depths of a bear market, but is it reasonable for an investor to maintain their optimism after losing their life savings in the 2008 housing crash? Housel would say no. If the choice is between potentially making tons of money at the low risk of losing everything you own or getting a low return but being able to sleep at night, it’s better to go with the latter. It’s okay to not make financial decisions that will make it difficult for you to look your spouse in the eye.

Chapter 14. You’ll Change

People have a tendency to assume that history ends with the present day. We assume all our changes are in the past. The teenager scoffs at their naiveté at 12, unable to imagine that they will have completely different hobbies and values at 25. As the 25 year old denounces their teenaged self, they picture themselves more or less the same at 30, 40, 50 and so on. No matter what age we are, we will inevitably change and become new people. When making plans for the future, financial or otherwise, we have to account for the distinct possibility that our career, our selves, our very lives may change. It’s only too common for the 40 year old to abandon the work the 30 year old had begun, for the 60 year old to completely undo what the 40 year old did.

Chapter 16. You & Me

Beware of the people in the stock market who have different goals. Some people are looking to buy a stock and sell it in a week. In that case, they don’t care about a business’s fundamentals, all that matters to them is that the stock goes up this week. If you’re looking to make reliable long-term gains in the stock market, it’s in your best interest to look for great companies with strong fundamentals and growth prospects. Ideally, you also want to wait for a time when these companies are out of favor with the market before investing. Don’t be swayed by soaring stock prices that result from people playing a different game from you. Just because your stock choices aren’t immediately verified by an increase in value doesn’t mean you should sell and switch to the crypto stock that’s “going to the moon.”

Chapter 17. The Seduction of Pessimism

People who give optimistic forecasts are thought of as naive and full of nonsense. People who offer pessimistic predictions are thought of as cautious well-wishers. There are many good reasons for favoring pessimism over optimism. Avoiding danger was far more conducive to our ancestors’ survival than appreciating luck and fortune. Another factor is the time frame. Growth in GDP and general standard of living is generally so slow as to be nigh-unnoticeable. Meanwhile, it only takes a moment for disaster to strike, for stocks to plummet and money to disappear.

Reality is a mix of optimism and pessimism, but due to a general tendency to hyperfocus on the negative, investors need to actively fight against the tendency to be pessimistic. Historically the stock market has rebounded after every big crash before subsequently growing to new heights. Our standard of living has improved to such a degree that even the luxuries of kings and emperors pale in comparison to today’s smartphone and air conditioning units. In truth, there is a lot of reason for optimism, as the opportunity to buy shares of good companies allow us to partake in their prosperity. The availability of investing opportunities to the common person is a democratization of wealth and voting power is unprecedented in history. It’s all a matter of perspective. Just as it would not do to be overconfident and let your dreams run away from you, it’s also important to account for the genuine grounds for optimism in your decision making.

Housel offers some additional insights for FIRE chasers.

Chapter 3. Never Enough

Get the goal-post to stop moving. As Warren Buffett says, never risk what you have and need for what you don’t have and don’t need. Examine your values and you will find that you actually need far less than you think you do to be happy.

Chapter 5. Getting Wealthy vs Staying Wealthy

People were able to get wealthy by being bold and taking risks. However, maintaining wealth requires playing it safe with your money and engaging in careful risk management. These skills call for different approaches and it’s important to cultivate both.

Chapter 7. Freedom

The most valuable dividend investments can pay is freedom. Look to maximize your freedom through financial independence so you aren’t beholden to paid employment.

Chapter 10. Save Money (For no reason)

You don’t need to save for something specific. There’s a first time for everything and the unpredictable events have the greatest impact because they, by definition, can’t be prepared for. Save your money, because it’s always better to have money on hand than nothing.

What makes The Psychology of Money unique?

While the advice laid out in The Psychology of Money is applicable to gaining and maintaining wealth, it’s also relevant to life in general. We all need a reminder every now and again that while the decisions of others sometimes don’t make sense to us, it made sense to them at the time. We must acknowledge that we are similarly susceptible to illogical tendencies, maintain awareness of the flaws in our own thinking, and approach others with sympathy.

The Psychology of Money takes a practical and empathetic view of personal finance in the modern age. It acknowledges that we are all different and in honor of that, it doesn’t try to give us specific money management advice. Instead, it offers us nuggets of wisdom to help guide our thinking so we are kinder to ourselves and those around us, and more realistic in our outlook.

Final thoughts:

As far as recommendations go, The Psychology of Money makes for a solid choice. The book is 256 pages, which is not too long but not short either. However, Morgan Housel offers readers a degree of flexibility not usually found in personal finance books by writing 20 individual chapters rather than a full 20-chapter book. You can read the chapters most pertinent to you and not feel like you’ve missed several steps of a math equation. It also helps that The Psychology of Money is written with simple language and includes enlightening true stories of other people’s (mis)adventures with money, making the book an altogether quick and engaging read.

If there was any criticism I might levy against The Psychology of Money, it would be that some of the chapters were repetitive. The writing is simplistic, which at the beginning helps reader understanding but later meant using repeat phrases and words rather than coming up with new ways to say the same things. Morgan Housel also offers little in the way of universal good money practices. As someone running through personal finance books by the dozen, I appreciate that Housel doesn’t unduly repeat points found in other books, but a part of me wonders if someone who only ever read The Psychology of Money and no other personal finance book might be missing out. Additionally, many people might find the core lessons of The Psychology of Money to be overly simplistic and none too insightful.

The Psychology of Money is a good read. It’s an even better read if paired with a book like The Richest Man in Babylon for personal finance principles alongside The Most Important Thing for investing principles.