Top lessons to learn from Psychology of Money by Morgan Housel

Written by Kaitholil Storyboard. Last updated at 2022-06-20 15:01:14

You don't need to be Mukesh Ambani or Ratan Tata to have a successful career and make a fortune. 


You just need to learn what they did right and understand some of the psychology of money that might help you along the way. 


Or what Anil Ambani did wrong.. !!


Learning how money works is what you need to know. 


One book that claims to help understand how money works is The Psychology of Money by Morgan Housel (Harper Collins, 2019). 


The book covers the psychology of how people make financial decisions and how they can make better ones. The goal is to provide readers with a framework for understanding their psychological biases and proactively managing them.


In this book, Morgan looks at how we approach money, why we do what we do with our finances, and how we can improve them. The following are some of the critical lessons that Morgan put forth in his book. 

Investing is a boring process.

You should be investing for a long time, and the market will go up and down during this period. 


It'll have periods of upturns and downturns — including some dramatic ones — but it also has a long-term growth trend.


You must overcome those ups and downs without getting too emotional about them. You should not panic when your investments drop in value for a few months or even years. 


You should also not become greedy when they shoot up because there might always be an impending downturn around the corner that could wipe out all of those gains.


So what does this mean? It means being boring with your portfolio. Don't try anything fancy with your money unless there's something specific on which you're trying to capitalize. Don't try day trading (it won't work). Don't buy into speculative ventures hoping to make quick profits off short-term movements.


Luck is the most critical factor, but it is not by chance.

If you're serious about building wealth, luck is the most critical variable in your success. 


Luck is a variable that is out of your control, and it's often unpredictable. Still, luck can be maximized with preparation and opportunity. 


Luck is a combination of practice, opportunity and timing. It's commonly thought of as a person who gets lucky breaks by chance or accident. 


Still, this definition isn't accurate because there's always some skill involved in making the best use of an opportunity when it arrives. Even if it's just doing something different than usual so that something happens differently.


Luck can be controlled by taking ownership over your financial life. 


You should be careful to put yourself in situations where good things have a greater chance of happening (i.e., their reactions). 


For example,


If someone offers advice about what stocks will do well next year (or any other long-term prediction), don't ask them for their opinion on which ones to buy now.


Instead, take action based on their advice when those opportunities come next year.

Our savings rate is a function of family wealth, changes in income, and surrounding opportunities.

If you're in the top 1% of wealthy families in India (with a net worth above $10 million), saving more than 10% of your income each year is easy peasy. 


You can afford to splurge on grandiloquent cars, pricey holidays, and luxury goods without fretting they'll eat into your retirement reserve. 


But most Indians live on a monthly salary, if not daily wages. 


You have trouble building up enough money to cover unexpected expenses like medical emergencies.


The same concept applies to income volatility. 


Our spending patterns depend mainly on how much money we make from one month to the next (and not so much on whether we earn an annual salary). 


Some people may be unable to set aside funds when their earnings fluctuate wildly from month to month or year to year. 


For example, a farmer can invest his earnings into his farm but then suffers a sudden agricultural loss due to unforeseen factors such as diseases or terrible weather conditions outside his control (or perhaps even something more personal like family issues). 


Then he might be forced into debt during times when he'll need extra cash flow just as much as any other person would. 


You don't get what you deserve; you get what you negotiate.

Negotiating is critical to getting what you deserve, but it's not about being aggressive or rude. 


You don't have to be a bully, and you don't have to be a pushover. 


If negotiation is all about power, then there is no room for people who lack control in their lives. 


I'm talking about children and women who are always disempowered by society.


Investment returns are more about behaviour than forecasting.

Forecasting the future is impossible, but comprehending your behaviour can help you make better decisions with your money.


On a related note, Housel also notes that our tendency to overvalue potential gains and underestimate potential losses has led many people to invest in the stock market.


Beware of false precision.

The most important lesson is to beware of false precision.


Precision and accurateness are not interchangeable. 


You can be precise without being accurate, and vice versa. 


The media often conflates the two because it makes for a more exciting headline.


For example,


"3% of Indians Have Seen a Himalayan Yeti" sounds much better than "Only 5% Of Indians Have Claimed To See A a Himalayan Yeti." 


It's easy for readers to assume that something is true because it seems like it should be accurate. 


However, just because something feels like a significant figure doesn't mean it's essential.


A good example from my life: 


In high school, I thought I was good at math because I could solve problems quickly on a calculator or by hand. 


This skill apparently does not translate well into real life outside math class!

When there's no social stigma attached to being wealthy, it's easier for people to be rich.

The social stigma associated with being wealthy can keep people from becoming rich in the first place. 


When there's no social stigma attached to wealth, it's easier for people to be more affluent.

We have no idea how the world is going to change.


In his book, Housel writes that we have no idea how the world will change. 


"We have no idea what technology or human invention we will create next. We also can't anticipate how these technologies will affect our emotions and behaviour." 


The only way to stay ahead of these changes is by being flexible and prepared for the unforeseen.


In this book, Morgan Housel explains how people make financial decisions. 


He analyzes the psychology behind these decisions and also looks at possible outcomes due to these choices. If you are interested in learning more about how our decisions affect our lives, this is an excellent read!


It's not just about earning as much as possible but learning how money works in the world around us so we can use it effectively. 


In fact, understand money in a way that makes sense for those around us (not just ourselves). 


This means being aware of not only our financial situation but also what other people are dealing with financially. 


Ultimately, we're all part of this enormous economic machine called "the economy" together!

Many decisions come down to your attitude toward uncertainty.

You can't avoid uncertainty. It's a part of life that we must learn to manage.


The more you understand uncertainty, the better you will be able to adapt and make better decisions in your life.


Our psychology is what drives the financial decisions we make

In his book, Psychology of Money, Morgan Housel argues that our psychology drives financial decisions. 


He articulates, "our psychology influences every financial decision we make."


Housel says that three main areas of psychology influence our savings rate:

  • The uncertainty principle (how much risk do you feel comfortable taking)
  • Regret aversion (how much regret do you want to think if something goes wrong) and
  • Loss aversion (how much pain it takes to feel like you lost money).

Some things will always be true (like people always wanting to retire early).

"You should think about money the same way you think about sex," says Morgan. "If you don't enjoy it, then why do it?"


The point is that people will always want to retire early, buy a house, have a family and car (or two), have a job they love doing while they're young, and go on vacation once in a while. 


These things will never change—so don't worry about them!

The most important financial lesson is the need to stagger your consumption over your lifetime.


Suppose you live on a fixed income and can't afford to retire today. In that case, it's better to work for another 5 years instead of spending the same amount on five vacations spread across those years. 


In any case, you'll want to invest your money instead of spending it. 


In fact, if you have no debt and can sock away 20% of your gross income every year until age 67, you'll have more than $1 million saved by retirement time. 


Even if that seems like an impossible goal, every little bit helps. 


If each dollar spent gets put aside in a separate account, it becomes easier to save and spend wisely over time.

Fear of loss is greater than the desire for gain.

The first thing you should take away from this book is the importance of loss aversion. 


Loss aversion is a psychological phenomenon that causes people to be more concerned with avoiding losses than achieving gains. 


For example, if you had $10 and lost $1, you'd feel worse than if someone gave you $10 and then took it back.


A second thing I want to highlight is how loss aversion can be used to your advantage as an investor. Fear of losing money prevents people from investing even when they have time on their side and no other pressing financial concerns (e.g., buying a house). 


In that case, investors who can put aside their fears will make more money from their investments over time. Those who don't invest fear losing what little money they have saved!

We can be better off financially by taking exciting ideas from the book and applying them to our lives.


The book contains insightful ideas and studies that can be applied to your life. 


For example:


You can use the idea that taking a break from money makes you more likely to spend it later. 


If you're tired of thinking about your budget, try going on a hike or reading a book for an hour instead. 


You'll come back refreshed and ready to get back into saving mode!


You can apply the idea that focusing on earning more money isn't as crucial as controlling where it goes. 


Maybe you charge too much for your services or give too much in taxes? 


Either way, start making changes, so you're getting closer to spending every dollar wisely. 


The good news? Once this happens, earning extra starts feeling like less work and more reward!

Look for long-term trends, not short-term forecasts.

The most important insight from this book is: Don't get caught up in the hype. 


Hype is a powerful force. It can lead you to make bad decisions, and, as we've seen, it can even lead investors to dump stocks when they should be buying them.


But sometimes, focusing on the long-term trend means ignoring short-term forecasts and other distractions—such as listening to your neighbour who tells you that "the market's crashing." Or watch CNBC every day, so you know what everyone else is doing and what they're saying about stocks.


The lesson here? Focus on what matters most—your financial future—and don't worry about what other people think or say about their investments or yours!


Look for optionality in life and investing.

One of the best ways to deal with uncertainty is by having options.


Options are a lot like money in that they have no intrinsic value. Still, they have some authentic and essential characteristics.


Optionality allows you to take advantage of surprise opportunities; it protects your downside. 


It helps you decide what course of action to take in the future when we don't know what will happen (or even if there will be a future).


Optionality is the ability to choose between good options. Still, sometimes all we can do is determine whether something is better than nothing at all. 


For example, imagine you're on a deserted island with no food or water, so eat sand or go hungry. 


This would be an easy choice because you know that sand isn't edible and won't provide any energy whatsoever while also consuming precious water needed for survival.


However, if someone offered up two different types of food—fresh fruit versus canned tuna fish--you'd probably choose one over another. Your choice then is based on preference rather than utility alone. 


Both options could provide valuable nutrients despite being fundamentally different from each other (and not just because one would taste better).


Now, I don't pretend to be a finance expert. 


I know that the more you understand how money works and how people respond to economic fluctuations, the better off you will be. 


In my understanding, a few key lessons in this book have helped me stay out of some tough spots when managing my finances. 


And they all came straight from Psychology of Money by Morgan Housel, an excellent read for anyone who wants to learn more about this fascinating subject! 


Morgan Housel is a fascinating writer, and his book is well worth reading. It's not just about money but also life in general. I hope you do so soon if you haven't read it yet!



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