The Psychology of Money Notes

Genre📚

Nonfiction: Economics/Psychology

Quick Summary🗒

Housel argues that most of our personal finance has to do with behavior and psychology, rather than simple math and logic. He uses stories, studies, and analogies to convey his points on how we should make our own financial decisions. 

Who is this for?🤷‍♂️🤷‍♀️

Everyone: “Two topics impact everyone whether you are interested in them or not: Health and Money”

Top 3 quotes💬

• The premise of this book is that doing well with money has little to do with how smart you are, and a lot to do with how you behave.”

• “We think about and are taught about money in ways that are too much like physics, with rules and laws. And not enough like Psychology, with emotions and nuance.”

• “In what other industry does someone with no college degree, no training, no background, no formal experience, and no connections, massively outperform someone with the best education, the best training, and the best connections.”

Notes📝

There are so many takeaways in this book that I broke these notes down into what I found the most important:

1. “Financial outcomes are driven by luck independent of intelligence and effort.”

2. “Financial success is not a hard science, its a soft skill where how you behave is more important than what you know.”

General things to understand about money💰

Luck and Risk 🍀/⚠️

When making investment decisions, many of us focus on replicating the successful investors and avoiding the failures. The problem with this, is that many of these stories contain a huge element that we often overlook: Luck and Risk. 

“Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.”

Luck and risk expose how the extreme examples we often look at for financial advice tend to be the least helpful. Most often, the more extreme the example, the more likely luck or risk played into its story. 

Bill Gates attended one of the only high schools in 1973 that had a computer. It was there where he had the unique advantage in being able to practice programming, and zero in on his love for technology. He was also born just early enough to be a teen before the tech boom of the 1980s. But, not born too early to have missed the wave, and have already been in the labor force by the time it happened. Gates is a genius, but he was also clearly born in the right place at the right time. 

Next, consider all the people who decided to invest into movie theaters in December 2019. The movie market was booming after blockbusters such as Avengers Endgame and Joker, so buying into this lucrative industry seemed like a no brainer. Yet, by march 2020 these expenses proved to be colossal failures. Theaters across the world were shut down due to health regulations caused by a global pandemic. The initial investments were not foolish though; you can almost count on one hand the number of global pandemics that have occurred in the last 2000 years of human history. They were simply made in the wrong place at the wrong time.

Bill Gates experienced 1 in a million luck, while the movie investors experienced 1 in a million risk. 

There are two key lessons to take away from Luck and Risk:

1. Be careful who you idolize or look down upon

The problem with luck or risk is that it can be difficult to attribute how much of it played a role into a given outcome. Attributing a large sum of someone else’s success to luck may seem as rude, appearing as if we don’t believe they earned their results. Similarly, attributing our own success to luck can sometimes undermine our achievements. Therefore, many of us decide to just forget about these two massive elements, seeing everything as a simple input-output. He made poor investment decisions and so that’s why he’s poor. She made wise investment decisions and so that’s why she rides a Porsche. It’s evident that life is not that simple. And so when measuring other people’s success and failure, always remember “its never as good or as bad as it seems.”

2. When looking at history for financial advice, look for general trends or patterns, not extreme examples.

Because luck and risk are essentially impossible to replicate, we should look at general patterns in personal finance to decide how best to spend our money. If there appears to be a pattern in people that save a high amount of their income generally feeling more independent and in control of their lives. Then that’s a statistic of way more importance to our personal finance than any Bill Gates or Warren Buffet story. Patterns will outlive any outliers so they should always be our focus.

Confounding Compounding 📈

If I were to offer you 1 million dollars today or a penny which doubled itself every single day for 1 month which would you take? Most people will take the million dollars without skipping a heart beat. But surprisingly, the penny is the better deal. After only one month of compounding, that single penny would have net you $5,000,000. 

This simple analogy perfectly demonstrates our common neglect of compound interest. Our minds like to keep things linear, so we often assume that large wealth gains over a lifetime take large initial investments. Yet, the simple truth of compound interest is that small initial investments over a long period of time can make a colossal difference. 

“Linear thinking is so much more intuitive than exponential thinking. If I asked you to calculate 8 + 8 + 8 + 8 + 8 + 8 + 8…in your head, you can do it in a few seonds…If I ask you to calculate 8 x 8 x 8 x 8 x 8 x 8 x 8…your head will explode.”

Now say instead of every day the penny doubled every year. If you cash in your penny twenty years after I gave it to you, it’s only worth around $5000 instead of the $5,000,000 its worth after thirty years. If you had started “saving'' just ten years earlier you would have been a millionaire. 

“There are books on economic cycles, trading strategies and sector bets. But the most powerful and important book should be called ‘shut up and wait’”

Bet on tails 🎰📈

Many people assume the way CEOs and companies become successful is through making consistently correct investment decisions. We get lost in this fantasy that to have the highest returns in life you have to always be making accurate financial decisions. This simply isn’t true. In reality, successful investing involves missing most of the time, but landing a few “tails” which net you the highest returns. 

“It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail, which just causes us to overreact when they do.” 

By 1937, The Walt Disney Company had produced almost sixty films over the twenty years since its creation. Yet even after all these movies, Walt was having to take out a loan to pay for his next full length feature. Disney was broke. It had produced a lot of misses, and the company was nearly ready to go under. And then Snow White and the Seven dwarfs comes out. It nets the company nearly 418 million dollars just in box office numbers. This more than covers all of the debt, even granting Disney the revenue to open a new studio in Burbank. The rest is history.

“An Oscar turned Walt from famous to full blown celebrity. By 1938, he had produced several hundred hours of film. But in business terms, the 83 minutes of Snow White were all that mattered.”

Disney’s story is not unique. It is applicable for almost every successful investor, company, or shareholder across all of todays industries. Take a look at Apple, fifty percent of it’s total annual revenue comes from the iPhone. Amazon, same story; nearly sixty percent of the entire company’s revenue stems from it’s online stores. Even Netflix focuses on pumping out as much content as possible, hoping that just one of their shows/movies will be an overnight hit. What these companies all do is bet on tails. They know for every ten HomePod, Fire Phone, or Death Note failures, there will be a Kindle, AirPods, or a Stranger Things which will more than offset the deficit, netting huge returns. 

What this should teach us is to not panic when things don’t go our way. We often think that being a good investor matters 100 percent of the time, but in reality it's only important in those 2-3 major financial moves we make in our lives. 

“When we pay special attention to a role model’s successes we overlook that their gains came from a small percent of their actions. That makes our own failures, losses and setbacks, feel like we are doing something wrong. But it’s possible we are wrong or just sort of right just as often as the masters are. They may have been more right when they were right, but they could have been wrong just as often as you”

Spend Money🛍

Man in the car paradox🏎

Picture this.

You are sitting outside at your local Starbucks, sipping down your ice cold Vanilla Macchiato. Suddenly, a red Bugatti rolls by. Its roaring engine, booming speakers and flashing lights are hypnotizing. Your first thoughts are probably “I would look so cool driving that car.” The irony in this statement is that the last thing you probably looked at or even thought about, was the person actually driving the car. 

“When you see someone driving a nice car you rarely think ‘wow that guy driving that car is cool’, instead you think ‘wow if I had that car people would think I’m cool.’”

Seriously, notice this next time you see a fancy car driving down the street. We never focus on the owner, instead we focus on how we would look with the shiny “toy.” 

Subconscious or not, this is true for a lot of things: watches, houses, technology, even clothes. You don’t want a fancy new car, what you want is other’s respect and admiration. Material things won't grant you that from the people you desire. This is clear from the “man in the car paradox.”

Wealth is what you don’t see👻

“When most people say they want to be a millionaire, what they may actually mean is ‘i'd like to spend a million dollars.’ And that is literally the opposite of being a millionaire.’’

Wealth is hard to understand, because it cannot be visualized. Wealth is all the extra cars and mansions not purchased. It’s the excessive clothes and watches unpaid for. Wealth is the money in your bank account unspent. It’s what we rarely get a peek at from other people.

You can see someone driving a Ferrari, and easily assume they are rich. But in reality, the only actual information you have gained about them is that they have $800,000 less in their bank account. Being rich does not equate to being wealthy, it equates to spending the money you have. And there are many people in this world who live on the knife edge of the line between what they earn and what they buy.

“The only way to be wealthy is to not spend the money you do have.”

Like a skinny teen goes to the gym to amass strength, most of us go to work to amass wealth. Both work hard everyday to advance their goals, but they also face the same difficulties mainting what theyv’e earned. 

“One study in America found that people overestimate the number of calories they burned in a workout by a factor of four. They also then consumed on average, about twice as many calories as they had just burned off.”

Essentially, its easy to undo all of the exercise through unhealthy eating. The same is true for money. We say to ourselves “I worked hard, I earned this reward”, without fully understanding what we can afford. 

“Wealth is turning down that treat meal and actually burning net calories.”

Money can’t buy you happiness, but…😁

Everyone is always preaching, “more money, more problems”, but have they ever considered “more money, more freedom?”

“Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness, a universal fuel of joy, it's that people want to control their lives.”

The modern age has allowed us to form careers out of just our brains. Humans are no longer just laborer’s, slaving away 10 to 15 hours a day in a factory. Most of us have become more comfortable and richer than ever, as technology has opened new business opportunities, and even allowed us to work from home. Yet, numerous studies have concluded that we are not any happier than we were in the 1950s. 

“A 2019 Gallup poll, with 150,000 people in 140 countries, found that about 45% of Americans said they felt a lot of worry the previous day. The global average was 39%. 55% of Americans said they felt a lot of stress the previous day. For the rest of the world, 35% said the same.”

This “comfort” that we have gained, has come at the expense of our freedom. Because technology allows us to carry our workplace anywhere, we can never truly disconnect. Emails from clients, phone calls from bosses, and project deadlines have become extended into our homes. Since our jobs are built from our brains, our thoughts continue to be surrounded by work even when we are not physically there.

So, where does money play a role in solving any of this?

“Money’s greatest intrinsic value is its ability to give you control over your time.”

Just, think about it. Money gives you the ability to sleep at night knowing that you can choose to do whatever you want with your time. Tired of your career, want to pursue a new passion? Having money allows you to wake up in the morning and try something new. It allows you to say “I want to see the pyramids in Cairo, i'll take off work next month”. Or “I can only work Monday through Thursday, my weekend time is reserved for my family”. It’s something so simple, yet it doesn’t appear obvious that money can buy control over our lives. While it can’t buy us happiness, money can make us more independent, controlling, and autonomous. 

Why you should save 🏦 

A lot of people in this world want more money. They often see two solutions: work harder or get another job. What if you could “create” more income by simply being more efficient with your spending?

In the 1950s’ the world went through a real oil crisis. Many experts estimated that by the turn of the century, the world’s oil and gas resources would be completely consumed. There were two camps of people: One group wanted to search every corner of the earth to find any small bit of undiscovered oil reserves. A strategy which would have costed billions of dollars, and possibly only extended our time with oil by a couple of years. The other group simply said “we are spending too much oil!” The latter won. New innovations in technology have allowed modern day cars to become more than twice as efficient as their 20th century counterparts. On average we use 60% less energy per dollar compared to the 1950s. 

Just like the oil industry generated more by spending less, our financial thinking should work the same. When you begin to think about savings as an extra revenue stream on top of the compound interest we discussed earlier, you will slowly amass fortune. It’s the second job you never knew you had. No one has to apply for it, or have certain qualifications. All you have to do is behave. 

Think about all the investors in the world who spend hundreds of hours a year, staring at data-boards and numbers, simply trying to push their annual returns up by less than half of a percent. Less than half a percent. How trivial does that sound now, compared to just being more efficient?

“Say you and I have the same net worth. And say you're a better investor than me. I can earn 8% annual returns, and you can earn 12% annual returns. But I'm more efficient with my money. Let’s say I need half as much money to be happy, while your lifestyle compounds as fast as your assets. I’m better off than you are, despite being a worse investor.”

Saving also allows the exact benefits of freedom I discussed earlier to take place. If you spend as much as you make, there is no room to decide to change your career one day or take a week off work to see your family. You have to make due with any consequential situation that comes at you. And even if you are happy, life has a tendency to throw curveballs at us when we least expect it. Think of it this way:

A successful lawyer works his way to the top of corporate law, and makes six figures a year. After twenty years of participating, he decides he’s bored of litigation, and wants to travel the world. The savings he accumulated over those twenty years allow that. All his other Lawyer friends who did not save, but are also tired of their careers, have to continue working. They may have had a bit more fun with their money every weekend, bought more expensive cars/houses, but they are much less in control of their lives as the lawyer who saved.

While it may seem counterintuitive, to unlock money’s most intrinsic value, freedom, we must save it.

Getting wealthy vs staying wealthy💯

“There are a million of ways to get wealthy and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.”

Knowing enough😋

Knowing when you have enough is just as important as getting enough. There are many people who are more than well off, but believe they don’t have enough. They often compare their wealth and status to others. Well off people compare themselves to wealthy people. Wealthy people compare themselves to millionaires. Millionaires compare themselves to billionaires. Billionaires compare themselves to richer billionaires.

What this perpetual hamster wheel creates is a state where we are never satisfied. Some of us may even hurt ourselves in the attempt to get more of something we don’t need: Housel calls out several stories of multimillionaire CEOs who in the attempt to become billionaires, threw away their careers and reputation by conspiring in insider trading. So before you make any risky financial decision, ask yourself “is there a chance I can throw away everything I have built here.” Don’t lose everything by chasing a golden apple, know what is enough. 

Staying wealthy🤑

Staying wealthy is like survival. It requires us to stay paranoid and understand that things will not continue how they are nor will they follow our plan. Financial planning is certainly a smart idea, but when we create our plans we need to understand the uncertainty that is the future. Pretend you had created a financial plan 20 years ago. Just think about how many worldwide events have impacted the global economy in the past 20 years: 9/11, a series of wars in the Middle East, a recession due to a crash in the housing market, a global pandemic, and now a Russian war which is still shaking our economy. Financial plans need to be flexible, so when one major world event follows the next, you're not wiped off the board.

“Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”

The other element in staying wealthy is what Housel calls “sensible optimism”. This means that we should be optimistic about long term economic growth knowing that there will be many ups and downs along the journey. As humans it's often hard to visualize the idea that something could be decreasing in the short term, while subsequently making mass progress in the long term. In the last 250 years, the United States GDP has increased 80%. Through all those recesssions, wars and pandemics, our economy has done nothing but grown in the long term. As long as technology and innovation stays growing at the same rate it is today, the economy will always triumph in the end.

Consider that by adulthood, the average human loses half the synaptic connections they were born with in their head. Yet, the average 18 year old is way smarter than the average 3 year old. Like the economy, our brains cut off excess while making true long term progression. 

“Imagine if you were a parent and you could see inside your child’s brain. Every morning you would notice fewer synaptic connections in your kid’s head. You would panic. You would say, ‘this can’t be right, there's loss and destruction here, we need an intervention, we need to see a doctor’’. But you don’t. What you are witnessing is the normal path of progress.”

Review🤔

I have to admit, I'm not the best with money. My work at i9 sports has spoiled me, and I believe making $30 an hour to watch a kid kick a soccer ball around will do something to just about anyone. I9 made me too comfortable with what I was making, almost forgetting its true value. I think it's called the “income effect”, where we tend to spend more when we make more, even if we don’t need it. I sure as hell was a victim of this, even if I didn’t see it. 

And then I read this book. Honestly, I'm not some insane investor now compounding millions in the bank. Healthy personal finance is a tough skill that takes years to master, and I still believe I'm starting this journey; growing up privileged will do that to you. What this book has given me is a new relationship with money. I have gained enormous insights into what money can get me and what it can’t. I have stopped looking at money so rationally, and instead I think about what is more reasonable in my actions. I focus on what I can control and ignore everything else. This book has helped me begin to understand the type of lifestyle I want to gain from my money. 

Housel breaks down the novel into twenty brilliant chapters which each contain a unique lesson on personal finance. It’s evident that this work took years of research and experience, as each chapter is packed to the brim with knowledge. Every story, example, or study is so different from the last, yet it's all so effective in translating what you need to understand. You don’t have to be a financial expert to read this book, I’m clearly not. Like Malcolm Gladwell, Housel popularizes complex economic ideas into simple to understand psychology. It creates a good starting point for anyone who is looking to think differently about their own personal finance. 

I love this work for the simple fact that it made me start behaving differently. And most of the time, that's how you know you are reading something truly special. 

Criticism🧐

My only real complaint on the novel, is that I found most of the valuable lessons to be loaded in the first half. In fact, a lot of these notes are only from the first half. I think this might be because of my age though, different generations have different uses for money after all. These notes were the lessons that I found most important and applicable for me. That’s not to say the second half of the book is useless, I just found the first half to be of much more value.

Reading Difficulty level: 2/5😌

Fairly straight forward ideas and concepts. Housel uses many examples and stories to convey his points so it’s not hard to follow. 

Book vs Audiobook📖/🎧

I would have to give the edge to the physical book version for this novel just because it is non-fiction. For these types of books if you really want to get the most out of what you learn you are going to want to read it. I listened to the audiobook and its great, but I have to admit it took me two listens to fully understand it.

Final Score out of 10⭐️

8/10: Great novel, would read again and recommend to most of everyone