Similarly, no amount of intelligence, savvy, or inside information will save you from the

wrong set of behaviors.

Each of the first 18 chapters in the book explores an individual human behavior or attitude
towards money (the final two chapters are a summary of the lessons and a commentary on
Housel’s personal financial practices). Certain behaviors induce positive outcomes while
others guarantee failure. For instance, the first chapter titled “No One’s Crazy” considers the
limits of our understanding vis-à-vis the limits of our personal experiences. Consider that we
are all, in the grander scheme of things, woefully inexperienced. “Your personal experiences
with money make up maybe 0.00000000001% of what’s happened in the world, but maybe
80% of how you think the world works.” In other words, there’s a huge gap between
firsthand knowledge and how we parlay those limited insights into making sense of the
world. Our experiences color our judgment, but the foundations of that judgement are
dubious, incomplete, and full of blind spots.

For example, consider two different people born in different decades and their attitudes
towards the stock market, one born in the 1950s and the other in the 1970s. The first
individual, as a teenager and young adult would have witnessed the anaemic stock market
returns of the 1960s-70s (low single digit returns in the decade aggregate). The second
individual, as an adolescent and young adult, would have watched the double-digit returns for
both the 1980s and 1990s. The latter is more likely to enter adulthood with a bullish attitude
towards equities. The former is likely skeptical of the stock market having witnessed two
decades of negligible returns. The lesson: you cannot discount the impact of personal
experience on your decision-making process (nor can you discount the unique set of
circumstances that influence the decisions made by others).

Housel’s book is filled with these sorts of lessons. Some lessons caution us against certain
behaviors, other lessons encourage us to embrace beneficial habits. The beauty of these
“The Psychology of Money: Timeless Lessons lessons is that they are accessible to anyone: they are not the sole domain of high-income
earners or those with elite education degrees. Reading this book won’t give you a profound
on Wealth, Greed, and Happiness” by Morgan knowledge about investment instruments, asset allocation, or tax-advantaged strategies; it
will, however, improve your relationship with money and your attitude regarding personal
Housel finance. It isn’t difficult, Housel assures us, financial wealth just requires discipline, patience,
and a handful of constructive behaviors.
Posted on September 22nd, 2020.
Introduction: The Greatest Show on Earth
Summary
• “The premise of this book is that doing well with money has a little to do with how
The Psychology of Money by Morgan Housel (2020) examines personal finance through the smart you are and a lot to do with how you behave.”
lens of human behavior. It’s a fresh take on a well-trod subject; many personal finance books • “A genius who loses control of their emotions can be a financial disaster. The
focus on exogenous considerations: e.g. how the stock market works, how to select stocks or opposite is also true. Ordinary folks with no financial education can be wealthy if
build a portfolio, how to time the market, etc. Housel’s focus is the relationship between they have a handful of behavioral skills that have nothing to do with formal
people and money—with particular emphasis on the human variable of the equation. “To measures of intelligence.”
grasp why people bury themselves in debt you don’t need to study interest rates; you need to • Two contrasting examples:
study the history of greed, insecurity, and optimism.” o Ronald James Read: Gas station attendant, janitor and American
philanthropist. Saved throughout his life, lived frugally and amassed an
Housel’s conviction is that behavior trumps other considerations in the pursuit of financial $8 million net worth at time of death. The majority of his fortune was
success. “Doing well with money has a little to do with how smart you are and a lot to do left to a local hospital and library.
with how you behave.” Engage in the right behaviors and you are likely to succeed.
 o Richard Fuscone: Harvard-educated Merrill Lynch executive. Borrowed paying for hope and a dream. Without being in their shoes, it’s hard to fully
heavily and spent lavishly, got hit by the 2008 financial crisis, declared appreciate why they behave the way they do.
bankruptcy. • Modern financial planning is relatively new. For instance, individual retirement
accounts are a recent phenomenon. 401k were created in 1978. Roth IRA was
o “Ronald Read was patient; Richard Fuscone was greedy. That’s all it created in 1998. Index funds were developed in the 1970s.
took to eclipse the massive education and experience gap between the • As Housel says, many of the poor financial decisions stem from our
two.” collective inexperience: “there is not decades of accumulated experience...we’re
• Two explanations that explain existence of stories like Read and Fuscone: winging it.”
o “Financial outcomes are driven by luck, independent of intelligence and
effort.” (true to some extent) Chapter 2: Luck & Risk

o “Financial success is not a hard science. It’s a soft skill, where how you • Outcomes are determined by more than effort. Luck and risk often figure
behave is more important than what you know.” (Housel believes this is prominently in individual outcomes.
the more common of the two explanations). • Story of Bill Gates: Gates attended one of the only high schools in the world that
had a computer in 1968. Were it not for the efforts of a teacher, Bill Dougall, to
• Knowing how to do something is insufficient. In many situations you also need to procure a $3000 teletype computer, it is unlikely that Bill Gates would enjoyed the
battle against your internal emotional and mental turmoil as well which will same career success.
influence or alter your planned response. o Gates himself admits as much: “If there had been no Lakeside [High
• “We think about and are taught about money in ways that are too much like School], there would have been no Microsoft.”
physics (with rules and laws) and not enough like psychology (with emotions and
nuance).” o At Lakeside there were three standout computer students (all friends):
• “To grasp why people bury themselves in debt you don’t need to study interest Bill Gates, Paul Allen, and Kent Evans. Kent Evans was destined for
rates; you need to study the history of greed, insecurity, and optimism.” success but met an untimely death in a mountaineering accident before
graduation. This is used as an example of bad luck.
Chapter 1: No One’s Crazy
• “Luck and risk are both the reality that every outcome in life is guided by forces
• Everyone has a unique idea of how the world works. This worldview is influence other than individual effort...they both happen because the world is too complex to
by a unique set of circumstances, values, and external influences. allow 100% of your actions to dictate 100% of your outcomes.”
• “Your personal experiences with money make up maybe 0.00000000001% of • “The accidental impact of actions outside of your control can be more
what’s happened in the world, but maybe 80% of how you think the world works.” consequential than the ones you consciously take.”
• “No amount of studying or open-mindedness can genuinely recreate the power of • “Focus less on specific individuals and case studies and more on broad patterns.”
fear and uncertainty.” o Extreme outcomes are low probability outcomes. Applying the lessons
• “We all think we know how the world works. But we’ve all only experienced a of those who achieved these outlier results isn’t always helpful since
tiny sliver of it.” external forces of luck and risk may have played immeasurable and non-
• For example: replicable roles.
o If you were born in 1950, the stock market was flat during your teens o Instead look at broad patterns that offer directional insights. For
and 20s (adjusted for inflation). instance, happy people tend to be those who control their time and
o If you were born in 1970, the S&P 500 increased 1000% during your energy.
teens and 20s (adjusted for inflation).
Chapter 3: Never Enough
o Which generation is more likely to have a bullish view of the stock
market? • Story about writers Kurt Vonnegut and Joseph Heller (Catch-22) attending a party
hosted by a billionaire. Vonnegut remarks that the billionaire makes more money
• “Their view of money was formed in different worlds. And when that’s the case, a in a single day than Heller made from his popular novel. Heller responds: “Yes,
view about money that one group of people think is outrageous can make perfect but I have something he will never have...enough.”
sense to another.” • Examples of Rajat Gupta and Bernie Madoff: People who had everything but
• Consider people most likely to purchase lottery tickets in the U.S.: low-income wanted more. They brought ruin upon themselves because they were greedy and
households who spend, on average $400/year. Number seems crazy to people in didn’t know when to stop.
higher income households. But some might justify the purchase by saying they are • “There is no reason to risk what you have and need for what you don’t have and
don’t need.”
 o “The hardest financial skill is getting the goalpost to stop moving.” o Be optimistic about the future but paranoid about the obstacles to your
success.
o Comparing ourselves to others is often the culprit. Capitalism is good at
generating both wealth and envy. But social comparison is a process Chapter 6: Tails, You Win
without end: there’s always someone higher up on the ladder.
o Enough doesn’t mean you have to go without. Enough means you know • Story of the art collector Heinz Berggruen. He amassed an amazing collection of
when to avoid doing something you will regret. Picassos, Braques, Klees and Matisses.
o People were amazed by his art investing acumen.
o Many things are not worth the risk, regardless of the gains. A short list:
reputation, freedom, family and friends, love, happiness. o The reality was that he bought massive quantities of art. Only a subset
of his collection was valuable.
• The only way to win is to refrain from playing the game.
o “Berggruen could be wrong most of the time and still end up
Chapter 4: Confounding Compounding stupendously right.”
• “Anything that is huge, profitable, famous, or influential is the result of a tail-
• The simplest fact about Warren Buffett’s fortune: He wasn’t just a good investor, event—an outlying one-in-thousands or millions event.”
he was a good investor for 75+ years. • This is the venture capital model: If a fund makes 100 investments, they expect
• “Effectively all of Warren Buffett’s financial success can be tied to the financial 80% to fail, a handful to do reasonably well and 1-2 to drive the funds returns.
base he built in his pubescent years and the longevity he maintained in his geriatric • Consider the distribution of winners and losers in the stock market: most public
years. His skill is investing, but his secret is time.” companies fail, a few do ok and a few generate extraordinary returns.
• “When you accept that tails drive everything in business, investing, and finance
• “Good investing isn’t necessarily about earning the highest returns...It’s about you realize that it’s normal for lots of things to go wrong, break, fail, and fall.”
earning pretty good returns that you can stick with and which can be repeated for • Warren Buffett stated at the 2013 Berkshire Hathaway shareholder meeting that
the longest period of time. That’s when compounding runs wild.” he’s owned shares in 400-500 different companies over his life. His significant
gains came from just a handful: 10.
Chapter 5: Getting Wealthy vs. Staying Wealthy • We see outsized results from a mere fraction of the events or actions in our lives.

• There are many ways to get wealthy. There is one way to stay wealthy: through a Chapter 7: Freedom
combination of frugality and paranoia.
• Getting money and keeping money entirely different things and require entirely • “The ability to do what you want, when you want, with who you want, for as long
different mindsets and strategies. as you want, is priceless.”
o “Getting money requires taking risks, being optimistic and putting
yourself out there.” • “Money’s greatest intrinsic value...is its ability to give you control over your
time.”
o “Keeping money requires the opposite...it requires humility, and fear
that what you’ve made can be taken away from you just as fast.” Chapter 8: Man in the Car Paradox
• Michael Moritz (venture capitalist): “We assume that tomorrow won’t be like • “When you see someone driving a nice car, you rarely think, ‘Wow, the guy
yesterday. We can’t afford to rest on our laurels. We can’t be complacent. We driving that car is cool.’ Instead, you think, ‘Wow, if I had that car people would
can’t assume that yesterday’s success translates into tomorrow’s good fortune.” think I’m cool.’ Subconscious or not, this is how people think.”
• Nassim Taleb: “Having an edge and surviving are two different things: the first
requires the second. You need to avoid ruin. At all costs.” • In other words, when we signal that we’re wealthy and that people should like and
• Having a “survival mindset” requires three things: admire us, what really happens is people ignore the person in possession of the
o Aim to be financially unbreakable: be able to stick out swings in the object of envy and just focus on the possession.
market and stay in the game long enough for compounding to work its
magic. Chapter 9: Wealth Is What You Don’t See
o The most important thing to plan for: the plan won’t go according to
• “Someone driving a $100,000 car might be wealthy. But the only data point you
plan. A good plan leaves room for error. “The more you need specific
have about their wealth is that they have $100,000 less than they did before they
elements of a plan to be true, the more fragile your financial plan
bought the car.”
becomes.”
• “Wealth is financial assets that haven’t yet been converted into the stuff you see.”
 • Housel reminds us that when people say they want to be millionaires, what over a one-year period are 68% likely, 88% likely over 10 years, and 100% likely
it really means is that they want to spend a million dollars. over 20 years.
• Spending a million dollars is “literally the opposite of being a millionaire.”
• Difference between wealthy and rich: Chapter 12: Surprise!
o People who live in big homes and drive fancy cars are rich. People with
big incomes are rich. They display the fact that they are rich. • Scott Sagan (political scientist): “Things that have never happened before happen
all the time.”
o Wealth is hidden. Wealth is income that is saved, not spent. Wealth is • “History helps us calibrate our expectations, study where people tend to go wrong,
optionality, flexibility and growth. Wealth is the ability to purchase stuff and offers a rough guide of what tends to work. But it is not, in any way, a map of
if you needed to. the future.”
• Remember: Past performance is not indicative of future results, as the ubiquitous
Chapter 10: Save Money financial disclaimer states.
• Focusing on past history and past patterns may cause two things:
• Three types of people (past a certain level of income): 1. Overlooking outlier events that move the needle.
o Those who save. ▪ Example: 15 billion people were born in the 19th and 20th
o Those who don’t think they can save. centuries. But consider the handful that inordinately
influenced historical events: Hitler, Stalin, Mao, Edison,
o Those who don’t think they need to save. Gates, MLK, etc.
• Your savings rate is more important than your income or investment returns. ▪ Example: Consider the projects, events and innovations of the
• Analogy: The 1970s oil crisis. last century: The Great Depression, WW2, Vaccines,
o Problem: Oil supply was insufficient to keep up with demand and Antibiotics, the Internet, the fall of the Soviet Union.
economic growth.
▪ Certain people and events have influence that is orders of
o Solution: Oil supply increased 65% but fuel efficiency and magnitude more than others. Housel calls these “tail events.”
conservation doubled what could be done with that energy.
▪ Tail events cause 2nd and 3rd order repercussions. “It is easy
o Supply side was out of people’s control but the demand side was to underestimate how things compound...for example, 9/11
completely within the control of the individual. prompted the Federal Reserve to cut interest rates, which
helped drive the housing bubble, which led to the financial
• “You can build wealth without a high income, but have no chance of building crisis, which led to a poor jobs market, which led tens of
wealth without a high savings rate, it’s clear which one matters more.” millions to seek a college education, which led to $1.6 trillion
• “Learning to be happy with less money creates a gap between what you have and in student loans with a 10.8% default rate. It’s not intuitive to
what you want—similar to the gap you get from growing your paycheck, but easier link 19 hijackers to the current weight of student loans...”
and more in your control.”
• “Past a certain level of income, what you need is just what sits below your ego.” ▪ “The majority of what’s happening at any given moment in
Solution: Don’t worry about what other people think or feel the need to keep up the global economy can be tied back to a handful of past
with the Joneses. events that were nearly impossible to predict.”
• “The flexibility and control over your time is an unseen return on wealth.”
• “Having more control over your time and options is becoming one of the most ▪ These surprise events are nearly impossible to predict
valuable currencies in the world.” because they are so improbable and depend on the luck and
occurrence of many similarly unlikely precursor events.
Chapter 11: Reasonable > Rational ▪ “This is not a failure of analysis. It’s a failure of
imagination.” It is difficult to imagine a future that looks
• “Do not aim to be coldly rational when making financial decisions. Aim to just be nothing like today or anything we have seen before.
pretty reasonable. Reasonable is more realistic and you have a better chance of
sticking with it for the long run, which is what matters most when managing ▪ Daniel Kahneman (psychologist and economist): “The correct
money.” lesson to learn from surprises: that the world is surprising.”
• Historical odds of making money increase over time. Lesson: stick to your guns ▪ Similarly we should be skeptical of those who profess to
and don’t let short-term volatility force a bad decision. Example: Positive returns know with great certainty how the future will unfold.
 2. Misreading the present by looking to the past because the past • “Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a
DOESN’T account for the structural changes that are relevant in today’s devil in a world where people change over time. They make our future selves
world. prisoners to our past, different, selves. It’s the equivalent of a stranger making
▪ Example: Certain financial mechanisms are new. Advice that major life decisions for you.”
predates these realities is obsolete. For instance: 401ks
appeared in 1978. Venture capital barely existed 25 years Chapter 15: Nothing’s Free
ago. The S&P 500 did not include financial stocks until 1976.
• “The key to a lot of things with money is just figuring out what that price is and
▪ Recent history is the most relevant to the future since it being willing to pay it.”
accounts for some of the important or relevant innovations
and conditions that will impact the future. • “Successful investing demands a price. But its currency is not dollars and cents.
It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to
▪ “The further back in history you look, the more general your overlook until you’re dealing with them in real time.”
takeaways should be.”
• “Few investors have the disposition to say, ‘I’m actually fine if I lose 20% of my
Chapter 13: Room for Error money...but if you view volatility as a fee, things look different.”

• Blackjack and poker players know they are dealing with probabilities not • When you invest in the long term, you need to be willing to accept the short-term
certainties. price of market fluctuations.

• The best plan is to plan for things to not go according to plan. Chapter 16: You & Me
• “Margin of safety—you can also call it room for error or redundancy—is the only • One reason for market bubbles: “Investors often innocently take cues from other
effective way to safely navigate a world that is governed by odds, not certainties.” investors who are playing a different game than they are.”
• “The odds are in your favor when playing Russian roulette. But the downside is • Short term momentum attracts investors with short time horizons. “Bubbles aren’t
not worth the potential upside. There is no margin of safety that can compensate so much about valuations rising. That’s just a symptom of something else: time
for the risk.” horizons shrinking as more short-term traders enter the playing field.” But note
• It is impossible to prepare for or anticipate what you cannot envision. that the short-term investors will only stick around so long as the momentum
continues, but that this momentum is transient.
• Minimize the impact of failure by avoiding single points of failure.
• “Bubbles do their damage when long-term investors playing one game start taking
• “The biggest single point of failure with money is a sole reliance on a paycheck to their cues from those short-term traders playing another.”
fund short-term spending needs, with no savings to create a gap between what you
think your expenses are and what they might be in the future.” • “It’s hard to grasp that other investors have different goals than we do, because an
anchor of psychology is not realizing that rational people can see the world
• Rainy-day funds are a good idea: save for things you cannot anticipate or predict. through a different lens than your own.”

Chapter 14: You’ll Change Chapter 17: The Seduction of Pessimism

• We are terrible predictors of our future selves. Our present needs, wants, and • “Pessimism isn’t just more common than optimism. It also sounds smarter. It’s
dreams are not the same as our future needs, wants, and dreams. intellectually captivating, and it’s paid more attention than optimism, which is
often viewed as being oblivious to risk.”
• “The End of History Illusion is what psychologists call the tendency for people • “Tell someone that everything will be great and they’re likely to either shrug you
to be keenly aware of how much they’ve changed in the past, but to underestimate off or offer a skeptical eye. Tell someone they’re in danger and you have their
how much their personalities, desires, and goals are likely to change in the future.” undivided attention.”
• The result is that long-term plans and decision-making is very difficult to do • Daniel Kahneman: “This asymmetry between the power of positive and negative
effectively. expectations or experiences has an evolutionary history. Organisms treat threats as
more urgent than opportunities have a better chance to survive and reproduce.”
• Accept the reality that individuals are prone to change. What matters to you today, • “Pessimists often extrapolate present trends without accounting for how markets
may be viewed as inconsequential in a decade. adapt.”
 o Remember the story from chapter 10 about the 1970s oil crisis: pundits Chapter 19: All Together Now
failed to account for innovation in fuel efficiency and cheaper, more
efficient oil extraction. • Chapter is a summary of the lessons in the preceding chapters: humility, less ego,
wealth vs. riches, financial decisions that offer peace of mind, use the power of
o Similarly, in the 2000s, as oil prices increased, certain type of oil time and consistency, accept failure and risk, strive for time freedom, frugality,
extraction became economically feasible such as fracking. make saving a core habit, be prepared to pay the price required for successful
• Necessity is the mother of all invention and humanity is endlessly innovative. outcomes, prepare a margin of safety, avoid extremes, define the game you’re
People respond to adversity and problems with new and novel solutions. playing.
• “Threats incentivize solutions in equal magnitude. That’s a common plot of
economic history that is too easily forgotten by pessimists who forecast in straight Chapter 20: Confessions
lines.”
• Progress is slow, but setbacks and disaster happens quickly and impactfully. • This chapter highlights some of the financial behaviors and beliefs of the author:
“There are lots of overnight tragedies. There are rarely overnight miracles.” o Independence drives all Housel’s financial decisions.
• “Growth is driven by compounding, which always takes time. Destruction is o Live below your means.
driven by single points of failure, which can happen in seconds, and loss of
confidence, which can happen in an instance.” o Derive pleasure from free or low cost activities: exercise, reading,
podcasts, learning.
Chapter 18: When You’ll Believe Anything
o Owns his house without a mortgage. Admits that this is a terrible
• “The more you want something to be true, the more likely you are to believe a financial decision but a great money decision (peace of mind).
story that overestimates the odds of it being true.” o Maintains 20% of his assets in cash (outside of the value of his primary
• “Everyone has an incomplete view of the world. But we form a complete narrative home). He does this to maintain a safety net and to avoid being forced to
to fill in the gaps.” sell his stock market investments in an emergency.
• B.H. Liddell Hart (historian) in his book “Why Don’t We Learn from History?”:
“History cannot be interpreted without the aid of imagination and intuition. The o Charlie Munger: “The first rule of compounding is never interrupt it
sheer quantity of evidence is so overwhelming that selection is inevitable. Where unnecessarily.”
there is selection there is art. Those who read history tend to look for what proves
them right and confirms their personal opinions.” o No longer invests in individual stocks. All Housel’s stock market
• Daniel Kahneman: “Hindsight, the ability to explain the past, gives us the illusion investments are in low-cost index funds.
that the world is understandable. It gives us the illusion that the world makes o “Some people can outperform the market averages—it’s just very hard,
sense, even when it doesn’t make sense. That’s a big deal in producing mistakes in and harder than most people think.”
many fields.”
• Rather than accept that we don’t know something we actively attempt to develop o “Every investor should pick a strategy that has the highest odds of
personal theories (stories) that creates illusory understanding that is successfully meeting their goals...for most investors, dollar-cost
psychologically comforting. Illusion of control vs. the reality of uncertainty. averaging into a low-cost index fund will provide the highest odds of
• Recognize that there is much you do not know and much that is outside of your long-term success.”
control.
• Philip Tetlock (psychologist): “We need to believe we live in a predictable, o Max out your retirement accounts and contribute to your kid’s 529
controllable world, so we turn to authoritative-sounding people who promise to plans.
satisfy that need.” o His financial situation is simple. All of his net worth consists of a house,
• Kahneman identified relevant errors in cognition: a checking account and Vanguard index funds.
o When planning we focus on what we want to do and can do and neglect
the plans, actions, and decisions of others who might impact our • “One of his deeply held investing beliefs is that there is little correlation between
personal outcomes. investment effort and investment results.”
• Three key elements of Housel’s approach: a high savings rate, patience, and long-
o When studying the past and forecasting the future we overemphasize term optimism.
individual skill and discount luck.
o We focus on what we know and ignore what we don’t know. This
results in overconfidence.