How We Develop Our Views on Money

This article is an excerpt from the Shortform book guide to "The Psychology of Money" by Morgan Housel. Shortform has the world's best summaries and analyses of books you should be reading.

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How would you describe your relationship with money? Why do so many people act in so many different ways when it comes to money?

According to Morgan Housel in his book The Psychology of Money, every person has a different relationship with money based on a few factors: what you live through, the financial climate, unemployment rates, etc. That’s why, no matter how much financial advice is out there, people will continue to act on what feels right to them.

Here’s why subjective rationality plays a huge role in your views of money.

Everybody Acts in Ways That Feel Rational to Them 

In a world that largely assumes that money acts on mathematical principles, why do we have such different views on money? Morgan Housel argues that it’s because everybody acts in ways that feel rational to them—but what seems rational to you isn’t subjectively rational to me. 

Housel argues that people develop drastically different ideas about what’s rational because our personal experiences with money define how we approach it in life, but we all have vastly different economic experiences, so we all have different views on money.

Housel argues that it’s not what you learn but what you live through that most affects your relationship to money. We create mental models of the financial world based on what we experience, and we act accordingly. Housel attributes this to the fact that real-life experiences leave an emotional impact that is impossible to replicate. In particular, Housel notes that while you can learn a lot of financial information from external sources, like textbooks, you cannot truly experience the anxiety of a particular financial situation unless you have lived through it. 

(Shortform note: If what you live through most affects your relationship to money because of the emotional impact personal experience has, can fictional sources—like a novel—recreate the emotional impact of a particular financial situation? It’s possible: Reading about something a character does stimulates the regions in your brain that control that action, so you might feel what the character feels, too.)

Early Adulthood Matters Most

Housel contends that people base their decisions mostly on the financial climate in their early adulthood, instead of on their goals or the specific features of investments available to them. He specifies three financial areas in which your personal experience—and thus your views—might consequently drastically differ from others:

(Shortform note: Housel’s argument that people base their decisions mostly on the financial climate in their early adulthood comes from a study that argued the same. However, the study shares an important caveat that Housel fails to include: While the financial climate in your early adult life remains influential decades later, you place the most weight on your most recent returns when making an investment decision. In other words, your early adulthood experiences affect your financial decisions today—so your experiences of stocks, inflation, and unemployment may affect your financial decisions today—but they don’t determine them.)

Since your personal experience with money differs drastically from others’, Housel contends, you operate on different financial information and have different values than everybody else. Therefore, behavior that seems irrational to you seems rational to other people. 

For example, 1970-born Rick might view stocks as a surefire money maker because they increased greatly in his early adulthood. As such, he might invest heavily in them. But 1950-born Pam might view stocks as an unstable investment given how little they moved in her early adulthood—and instead hold mostly cash. Rick and Pam both view the other’s strategy as irrational—but each strategy is rational within the mental model each person holds. 

(Shortform note: The assumption that other people behave the way you do—when they don’t—is not limited to finance but is, in fact, a psychological phenomenon known as the false-consensus effect, which holds that we’re prone to believing that others agree with beliefs that we deem important or probably correct—and most of us think that our financial beliefs are both important and probably correct.)

How We Develop Our Views on Money

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Here's what you'll find in our full The Psychology of Money summary :

  • Why the key to financial success lies in understanding human behavior
  • How to make better financial decisions
  • How chance plays a bigger role in our financial lives than we think

Hannah Aster

Hannah graduated summa cum laude with a degree in English and double minors in Professional Writing and Creative Writing. She grew up reading books like Harry Potter and His Dark Materials and has always carried a passion for fiction. However, Hannah transitioned to non-fiction writing when she started her travel website in 2018 and now enjoys sharing travel guides and trying to inspire others to see the world.

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