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The Psychology of Money by Morgan Housel.
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Most of us assume financial success depends on education and intelligence. But in The Psychology of Money, finance expert Morgan Housel presents an alternate hypothesis: The key to financial success lies in understanding human behavior. Housel posits that when you understand how emotions and beliefs influence your financial decisions, you’ll make better financial decisions.

In this guide, you’ll learn why people fail to achieve financial success and why you want money. You’ll also learn what to include in your financial strategy, how to create one you can follow for decades, how to follow it through those decades—and how to pay attention to the information you need to do so.

Why People Fail to Achieve Financial Success

Money is ubiquitous—so why do so few people master it? Housel posits two major reasons: We underestimate the role of chance in financial success, and we confuse being wealthy with being rich.

Lesson #1: Chance Plays a Bigger Role in Our Financial Lives Than We Give It Credit For

Housel suggests one reason we fail to become financially successful: We underestimate the role chance plays in our financial lives. For example, we forget Bill Gates was successful not just because he was intelligent but also because he got lucky: He was (literally) one in a million teenagers who had access to a school computer in 1968. (Shortform note: In Fooled by Randomness, former trader Nassim Nicholas Taleb adds that when you succeed matters: Early success helps determine subsequent success because winning an early random advantage positions you to win subsequent random advantages. Microsoft may have succeeded partly because Gates got an early advantage through chance contracts and positive feedback.)

Housel contends our ignorance of chance is dangerous because many people try to gain wealth by imitating the most exceptionally successful people—but thanks to chance, copying what they did often doesn’t lead to success. As Housel notes, the more exceptional the story, the more likely luck played a bigger role in its outcome. So the more exceptional the story, the more unique it is and so the less likely you are to be able to learn lessons from it.

Instead, Housel recommends that you pay attention to patterns, not people. If many wealthy people did Thing A to get wealthy and only one wealthy person did Thing B, it’s more probable doing Thing A will make you wealthy. (Shortform note: Taleb warns that while you can gain moderate success by following the patterns of the wealthy, you’re unlikely to get wild success—millions of dollars and lasting fame—without luck: a positive rare event plus few negative rare events. Just because something (like a certain pattern of behavior) is necessary for wild success doesn’t mean it caused wild success.)

Lesson #2: We Confuse Being Wealthy With Being Rich

Housel pinpoints another reason we fail to achieve financial success: We confuse being wealthy with being rich. He explains that if you’re wealthy, you have a lot of money in the bank. In other words, wealth is money you’re not using but could use if you wanted to. But if you’re rich, your current income is high: You have money you’re able to spend on expensive items.

Crucially, Housel contends, you can tell whether someone is rich, but you can’t tell if they’re wealthy. This is because you can see how much someone spends on items, but you can’t see inside of their bank account to see the money they’re not using—in other words, their wealth. Of course, someone can be both rich and wealthy, but you can only see how rich they are.

(Shortform note: The Millionaire Next Door authors Thomas J. Stanley and William D. Danko first popularized the difference between being wealthy and being rich. They also noted that rich people can lack wealth, and that it’s hard to identify the wealthy since they save their money. But they define wealth as your net worth, which is your current assets minus your liabilities.)

Knowing the difference between being wealthy and being rich is essential because we learn by imitation, Housel argues. And knowing who to imitate—and who not to imitate—helps us protect our money.

In an ideal world, you could learn how to be wealthy by seeing the self-control wealthy people exercise. But since wealth is obtained by not spending your money, you can’t see the process. Therefore, it’s hard to learn wealth by imitation—you don’t know who to imitate. (Shortform note: Even if you don’t know who to imitate, you can discover what habits lead to wealth with the right resources—like The Millionaire Next Door, which describes the habits of the wealthy.)

But it’s easy to see and imitate people who are rich—and if you don’t understand they might not also be wealthy, you may assume being wealthy means you can spend money as you wish. But behaving this way will impoverish you. When you understand the difference between being rich and being wealthy, you avoid this trap and prevent yourself from draining your money away. (Shortform note: Stanley and Danko suggest that rich people who aren’t wealthy are imitating not other rich people but their lower-income parents, who taught them money is something to spend when you have it—not something you save to grow your wealth.)

Understand Why You Want Money

Now that you’ve learned why people fail to achieve wealth, you can adopt the mindsets Housel believes are essential for a healthy attitude about money: Money is valuable because it...

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The Psychology of Money Summary Shortform Introduction

How can you become financially successful? In The Psychology of Money, finance writer Morgan Housel posits that the secret lies in understanding human behavior: When you understand the emotions and beliefs that influence your financial decisions, you make better decisions. In his book, Housel illuminates these emotions and beliefs, explaining why we make bad financial choices—and what you should do instead.

About the Author

Morgan Housel is an award-winning finance writer and former finance columnist at The Motley Fool and The Wall Street Journal. He is also a partner at The Collaborative Fund, a venture capital firm specializing in technology.

Connect with Morgan Housel:

The Book’s Publication

Publisher: Harriman House

Published in 2020, The Psychology of Money is Housel’s third and most popular book. It differs from his previous book because it is full of new and original insights: His first book, _[Everyone Believes It; Most Will Be...

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The Psychology of Money Summary Introduction

In The Psychology of Money, author Morgan Housel argues that when it comes to money, understanding human behavior is more important than understanding the mathematical details. According to Housel, most people assume that money follows a set of laws, the way physics or math does: If you understand the laws, you understand how money works and can achieve financial success. Therefore, people assume that financial success depends on education and intelligence.

However, Housel argues, neither math, intelligence, nor a knowledge of how markets work guarantees financial success. Rather, he contends, the key to financial success lies in understanding why humans behave the way we do. For example, if we all know that we should save 10% of our incomes, why do so few of us do it? When you understand not just the math but also the emotions and beliefs that influence your financial decisions, you can learn how to make better financial decisions.

Housel, a finance expert and former Wall Street Journal columnist, came to this conclusion shortly after the 2008...

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The Psychology of Money Summary Part 1: Why People Fail to Achieve Financial Success

Money is everywhere and touches almost every part of everyone’s life. So why do so few people succeed in mastering it? In this section, we’ll learn why so many people struggle to manage their money well. We’ll discuss why people follow so many different rules when it comes to money and how that can hamper your financial success. We’ll then explore three additional reasons people struggle to achieve financial success: We underestimate the role of chance in financial success, we look to the past to predict the future, and we confuse being wealthy with being rich.

Lesson #1: Everybody Acts in Ways That Feel Rational to Them

In a world that largely assumes that money acts on mathematical principles, why do so many people act in so many different ways when it comes to money? In Chapter 1, Housel argues that it’s because everybody acts in ways that feel rational to them—but what seems rational to you isn’t 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 approach money...

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The Psychology of Money Summary Part 2: Understand Why You Want Money

You’ve now learned why so many people fail to achieve financial success. In this section, Housel outlines some mindsets that he recommends you develop to foster a healthy attitude toward money. They involve understanding the true value of money so that you can know what expectations you should and shouldn't have for your wealth.

Housel argues that the true value of money is that it buys you control over your time. He also notes what isn’t the true value of money: Money isn’t valuable because it buys you “more,” and it’s not valuable because it buys you respect.

Lesson #5: Money Buys Us Control Over Our Time

In Chapters 7 and 10, Housel explains the true value of money: Money buys you control over time, which psychologists contend is the key driver of happiness.

Housel explains that when you have control over your time, you can choose what to do and when you want to do it. Housel argues that this ability—this flexibility—is essential for two main reasons. First, the more flexible you are, the more options you have—and the more economic opportunities you have access to. For example, you can afford to take time off to develop a new skill that sets you apart from...

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Shortform Exercise: How Can You Gain Control Over Your Time?

Housel argues that the most important value of money is that it buys you control over your time. Take a moment to think about what that might mean for you.


Describe a goal that you have that you aren’t currently working toward because you don’t have enough time to. If you didn’t have your current professional obligations, what would you do with your time instead? Is there a second career you’ve always wanted to pursue? A hobby you’d love to explore? A skill you’d like to master?

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The Psychology of Money Summary Part 3: What to Include in Your Financial Strategy

Now that you understand how to think about money, we’ll discuss the essential elements you must include in your financial strategy. Housel posits that there are three main elements: You must take advantage of compounding, you must save money, and you must include a plan for when things go wrong.

Lesson #8: Take Advantage of Compounding

In Chapter 4, Housel explains that the longer you invest, the more money you make because returns compound—that is, they build on previous returns to make ever-increasing returns. Housel recommends that you take advantage of compounding by finding investments that return solid, consistent results over time. He argues that ultimately, this strategy will make you the most money.

He argues that because of the power of compounding, how long you invest is the most important factor determining your investment success—even more than other factors that seem intuitively important, like your annual returns. Housel illustrates this point with the stories of James Simons and Warren Buffett. Hedge fund executive James Simons is arguably the world’s best investor: Since 1988, his annual returns have compounded at 66%—three times the rate of...

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Shortform Exercise: Protect Your Money

Now that you’ve learned why planning for setbacks is essential to a successful financial strategy, you can think about where your own financial strategy might be vulnerable—and how to protect yourself.


First, select a financial area of focus: either your income or your investments. Describe a worst-case scenario for that area and the results. What would happen if, for example, you get fired or the market you’re invested in crashes?

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The Psychology of Money Summary Part 4: How to Create a Financial Strategy You Can Stick To

You now know what to include in your financial strategy—but how do you make sure your strategy is one you can stick to over decades? Housel names three principles to keep in mind: Expect your future goals to change, prioritize sense over logic, and develop a survival mentality.

Lesson #11: Expect Your Future Goals to Change

In Chapter 14, Housel shares one critical key to developing a long-term strategy you can stick to over decades: Expect your future goals to change, react quickly when they do, and build flexibility into your financial plan.

As we’ve seen, one major element of financial success is letting your money sit as long as possible so it accumulates the maximum amount of compound interest. Housel posits that leaving your money alone for this long is difficult partly because people change, but since they’re unable to predict how they’ll change, they don’t invest their money in ways that will work for their future selves.

Housel explains that when making financial plans, most people fall victim to the end-of-history illusion, a psychological phenomenon where you recognize that you’ve changed significantly from who you were, but you don’t expect to...

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The Psychology of Money Summary Part 5: How to Counter Negative Thinking

In the previous section, you learned several keys to creating a financial strategy that you can stick to long-term. But in an ever-fluctuating market, how do you handle the inevitable bad times? Housel shares three lessons to help you evaluate bad news appropriately: Don’t be put off by either uncertainty or pessimism and remember that even if you fail frequently, you can still succeed.

Lesson #14: Don’t Be Put Off by Uncertainty

In Chapter 15, Housel shares one key to reacting well to bad news: Don’t be put off by uncertainty. He argues that in order to achieve long-term investing success, you must accept that you’ll feel uncertainty as the market fluctuates. Otherwise, you won’t be able to endure the uncertainty long enough to let your returns compound.

Housel explains that investing inherently includes some measure of uncertainty—and the higher the potential gain, the more uncertainty you feel. For example, the longer you let your stocks compound, the more money you can gain, but the longer you have to feel the uncertainty of not knowing exactly what will happen to your money. Conversely, if you hold low-value bonds, you won’t accrue much value—but since bonds...

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The Psychology of Money Summary Part 6: How to Pay Attention to the Right Financial Information

Sticking to a long-term financial strategy doesn’t just require you to understand the mindsets above—it also requires you to know how the information you encounter affects your decisions so that you can make better decisions. In this section, we’ll share Housel’s two lessons that help ensure you pay attention to the right information: Know your personal financial goals, and be careful what stories you believe about money.

Lesson #17: Know Your Personal Financial Goals

In Chapter 16, Housel argues that one way to ensure you pay attention to the right information is to know what financial goals matter to you personally so that you don’t get caught up chasing the goals of other people. In other words, don’t get caught up in a herd mentality chasing investment opportunities that lots of other people are chasing, just because others are doing it.

Housel explains that when you know your financial goals, you can ignore irrelevant information that might lead you to make poor decisions, such as basing your financial moves on others’ actions, and thus you’re able to make better financial decisions and better protect your financial health.

To demonstrate the risks...

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The Psychology of Money Summary Part 7: Why We Think How We Do About Money (Postscript)

In his postscript, Housel posits that in addition to the lessons shared above, you must also understand US economic history to know why the average American thinks about money in the way that they do. He posits that the average American is angry with the current level of economic inequality in the United States because they hold a cultural expectation that we should all make roughly the same amount. He argues that the post-war economic boom led us to this expectation—but that it also led us to develop a cavalier attitude towards debt, which in turn led us to a reality where that expectation no longer rings true.

(Shortform note: The fact that Housel focuses uses his postscript to explain the mindset of the U.S. consumer explicitly indicates that his advice is most applicable to American consumers in the U.S. market. While this is obvious within the text due to his emphasis on how compound interest works in the U.S. market, his book is advertised as sharing universal principles that apply to how people think about money, not how Americans think about money. As such, non-American readers may find this section especially frustrating, given that it doesn't provide them insight...

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