54 pages • 1 hour read
Morgan HouselThe Psychology of Money
Nonfiction | Book | Adult | Published in 2020A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Chapters 13-15Chapter Summaries & Analyses
Chapter 13 Summary: “Room for Error”
Housel compares investing to blackjack, which is a “game of odds, not certainties” (124). He advises the reader to cope with the unpredictable nature of finance by always allowing a “margin of safety” in their money planning. This concept, which Housel credits Benjamin Graham with inventing, is the only way to ensure that one can participate in the financial world without risking ruin. The author laments how people’s biases can cause them to underestimate risk or expenses. He cites a study by a Harvard psychologist, which demonstrated that people are much more critical of other people’s budgets than their own.
Housel claims that the concept of “room for error” is underappreciated and that it is an essential part of guaranteeing financial survival, as it allows one to enjoy the benefits of long-term saving and compounding (126). Housel advises the reader to consider not only what losses they could financially afford, but also what they could endure emotionally. He calls leverage, which is the practice of “taking on debt to make your money go further,” the “devil” since it can lead to financial ruin (129). Another financial hazard is what Housel calls “single points of failure” (132), or problems that completely halt progress. According to Housel, the most common “point of failure” is relying too much on paychecks to meet spending needs, with no savings as a backup safety net (132). The author reiterates that to avoid such disasters it is essential to have a balanced or “bar-belled” approach that is both optimistic, but also cautious, and prioritizes saving (130).
Chapter 14 Summary: “You’ll Change”
Housel explores how most people cannot predict the ways that their own goals and preferences will change over the course of their lives. Psychologists call this bias “The End of History Illusion” (136), which makes it more difficult to properly develop and maintain a long-term financial plan. Housel shares an anecdote about a hardworking friend who managed to become a doctor, a career which he eventually hated.
While Housel feels there is no “easy solution” to the fact that we all change, we can follow some guidelines to minimize financial blowback from our choices and the depletion of our savings. The first is to “avoid the extreme ends of financial planning” (138) such as assuming that you can tolerate a frugal lifestyle forever, or that you will always have a high income. These extremes are likely to change and are therefore not sustainable choices. It is better to prioritize moderate options that will allow your savings to go untouched and compound over time. Housel also advises the reader to accept personal change as an inevitable part of life and to move on quickly, rather than ruminating over the past.
Chapter 15 Summary: “Nothing’s Free”
Housel claims that “everything has a price” (142), including the world of investing. He encourages the reader to expect that some stocks will lose money and to regard these losses as expected fees that are inherent to participating in the market. Housel uses several statistics to show how long-term investments can pay off while often losing money from time to time. He argues that investors who try to make profits and avoid losses by selling when prices decline tend to make less money in the long run than those who accept some poor returns and sustain their investments over years or decades.
Housel insists that the reader should view losses as a “fee” rather than a “fine” and accept that not all investments will always bring in a profit. He notes that people will always accept that they have to pay for other services, but are easily spooked by investment losses. He argues, “[Y]ou get what you pay for” (148), since investing can cost you more than savings accounts or buying bonds, but is also more likely to generate profits in the long run.
Chapters 13-15 Analysis
Housel takes a cautious approach to risk, errors, and ruin. By characterizing leverage as the “devil,” Housel argues that risky attempts to “get rich quick” should be strictly avoided. By connecting people’s biases to their relationship with risk, Housel again stresses the role of personal perceptions in finances. He uses both academic data and a historical anecdote to support this claim, encouraging the reader to consider themselves as vulnerable to bias as anyone else. For instance, he relays the story of Nazi Germany’s powerful army expecting a victory in Stalingrad, only to realize that mice had chewed through their tanks’ electrical systems, destroying them. Housel uses this example to support his idea that, “You can plan for every risk except the things that are too crazy to cross your mind” (131). Housel’s examples also reinforce the importance of humility—another one of his repeated recommendations—by arguing that no plan is ever completely certain.
Housel uses these observations to repeat another warning from his previous chapters, insisting that no one should listen to supposed “experts” who claim to make predictions with certainty. He laments that these kinds of commentators are often given more attention than more nuanced analysts. He explains, “The pundit who speaks in certainties will gain a larger following than the one who says ‘We can’t know for sure,’ and speaks in probabilities” (126). Housel therefore suggests that the media culture’s tendency to comment on finances and the economy in a way that lacks nuance is often misleading and counterproductive.
Housel argues for nuance in everyone’s approach to money management and understanding of the economy. For example, while he urges the reader to always avoid potentially ruinous risks, he advises that some small risks are necessary to generate wealth. He quotes mathematician and risk analyst Nassim Taleb as saying, “‘You can be risk-loving and yet completely adverse to ruin.’ And indeed, you should” (128). Housel classifies risk into two categories: known and unknown. He points out that he could never have predicted unfortunate circumstances that impeded some of the companies he has invested in, such as robberies or building floods. Housel uses these unknown risks, which he says are “impossible” to predict, as another reason for everyone to save money, since keeping extra money accessible is the only way to mitigate unknown problems that may arise. Housel again emphasizes the critical role that savings play in a healthy financial plan.
Housel challenges the reader to consider their own life trajectory and how they have changed personally and professionally since they were a young adult. By exploring how our preferences and goals alter our relationship with money, the author builds on his theme of how Personal Perspectives Inform Financial Management. He cites the “End of History Illusion” to support his notion that people tend to “underestimate how much their personalities, desires, and goals are likely to change in the future” (136). Housel again encourages the reader to assume that they, too, can be oblivious about their own decisions. He writes, “When you accept the End of History Illusion, you realize the odds of picking a job when you’re not old enough to drink that you will still enjoy when you’re old enough to qualify for Social Security are low” (139).
Instead, Housel urges readers to remain open-minded and flexible, and be ready to embrace change instead of resisting it. His claim that “You’ll Change” also connects to his plea for the reader to be “reasonable” rather than “rational.” While a rational choice may be to choose a high-income career and work steadily at it until retirement, Housel points out that this is rarely a sustainable choice, since people become burnt out or depressed in the wrong position. A more reasonable option is to accept that you may change your mind about aspects of your life plan and to adjust accordingly. These points help Housel acknowledge the ever-changing internal and external conditions we all cope with as we manage our finances.
