The Psychology of Money

“You know stuff about money that I don’t, and vice versa. You go through life with different beliefs, goals, and forecasts, than I do. That’s not because one of us is smarter than the other, or has better information. It’s because we’ve had different lives shaped by different and equally persuasive experiences.”

Housel aims to broaden the reader’s notion of financial smarts by arguing that people learn equally important and valid lessons that differ based on their experiences. In making this argument, Housel presents financial management as a somewhat relative skill, rather than a matter of concrete right or wrong. He also encourages the reader to consider others’ experiences and perspectives with humility and an open mind—an unusual recommendation from a financial self-help book.

“Studying a specific person can be dangerous because we tend to study extreme examples—the billionaires, the CEOs, or the massive failures that dominate the news—and extreme examples are often the least applicable to other situations, given their complexity.”

Housel urges the reader to consider broad statistics and average results more reliable than the more sensational stories about outliers, whether successful or unsuccessful. This quotation persuades the reader that American culture’s obsession with dissecting specific events and personalities does not help disseminate sound financial wisdom, while also underestimating the role of chance in famous success stories.

“The hardest financial skill is getting the goalpost to stop moving. But it’s one of the most important. If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort. It gets dangerous when the taste for having more—more money, more power, more prestige— increases ambition faster than satisfaction.”

Rather than urging the reader to strive to become a millionaire or billionaire, Housel recommends carefully considering wants and needs, and to keep “expectations” in check. Housel acknowledges the sometimes-addictive nature of financial success and emphasizes that in order to keep wealth, people should be afraid of losing it rather than willing to risk it in order to attain more. This quotation develops Housel’s theme of the role of self-control and state of mind in financial planning.

“What would a rough estimate of his net worth be today? Not $84.5 billion. $11.9 million. 99% less than his actual net worth. Effectively all of Warren Buffet’s success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time.”

Housel dissects Warren Buffet’s financial story to demonstrate how longevity and compounding were the key to his unusual success. Housel’s analysis of compounding—and the patience required for it to yield results—emphasizes how people of nearly any income bracket can grow substantial wealth over the course of their lives.

“Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve just made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be expected to repeat indefinitely.”

Housel examines the paradox that arises as people try to acquire and keep wealth. This passage helps him to explain his own “bar-belled” approach in which he is adventurous and risk-taking with some of his money while being more protective over the rest. This quotation also adds to Housel’s theme about our state of mind, since he recommends some degree of fear and humility to even the most successful people.

“Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.”

Housel laments how people interested in finance spend too much time and attention analyzing “tails,” or very unusual or sensational events and people. He argues that since these tails are exceedingly rare, it is difficult to learn any applicable lessons from them; as such, people should focus on more common, albeit modest, success stories.

“The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today’ […] The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.”

Rather than encouraging the reader to seek riches in order to attain luxury or status symbols, Housel defines real wealth as freedom. This definition redirects the reader from materialist perspectives to the role that jobs and wealth play in our lives and how we may live differently if we had more of our time to ourselves.

“When you see someone driving a nice car, you rarely think, ‘Wow the guy driving that car is cool.’ Instead you think, ‘Wow if I had that car people would think I’m cool.’ […] There is a paradox here: people tend to want wealth to signal to others that they should be liked and admired. But in reality those other people bypass admiring you not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.”

Housel warns the reader away from showy materialism by claiming that people are too self-absorbed to be impressed by the owners of the status symbols they see. Attaining status symbols does not bring real respect or admiration from others, Housel argues, so it is better to have freedom-based financial goals instead of materialism-based ones.

“The danger here is that I think most people, deep down, want to be wealthy. They want freedom and flexibility, which is what financial assets not yet spent can give you. But it is so ingrained in us that to have money is to spend money that we don’t get to see the restraint it takes to actually be wealthy. And since we can’t see it, we can’t learn about it.”

Housel contrasts being “rich” with being “wealthy,” claiming that maintaining real wealth requires some restraint. This quotation challenges the reader to rethink how they manage their money and to value freedom over material things.

“The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency. Keep this in mind when quickly judging others’ success and setting your own goals.”

Housel seeks to tone down the competitive tone of the financial industry in the US by encouraging the reader to not judge others. By directing the reader’s focus to their long-term goals and encouraging a modest approach, Housel emphasizes the value in living within your means and saving for the future.

“Investment returns can make you rich. But whether an investment strategy will work, and how long it will work for, and whether markets will cooperate, is always in doubt. Results are shrouded in uncertainty. Personal savings and frugality […] are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.”

Housel urges the reader to view personal savings as a sure bet in a very unpredictable financial world. Rather than sensationalizing financial advice and claiming to have a certain secret or method, Housel argues that the reader should always live below their means as much as possible, to make personal savings a possibility.

“[O]ne of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility. When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little. It’s a daily struggle against instincts to extend your peacock feathers to their outermost limits and keep up with others doing the same.”

Housel’s warning against caving in to your “ego” and striving after outward materialism (“peacock feathers”) reminds the reader of the cautionary tales he has shared in his work. Rather than spending as much as your bank account allows, Housel urges the reader to increase their savings by realizing how little they need and recognizing their ego’s role in pursuing new unnecessary desires.

“The most important driver of anything tied to money is the stories people tell themselves and the preferences they have for goods and services. Those things don’t tend to sit still. They change with culture and generation. They’re always changing and always will.”

Housel stays away from grand claims about which stock or service is always wise to invest in, only observing that everything will continue to change. This quotation ties in with his argument that the reader should be prepared for surprises, bad luck, and an ever-changing financial environment.

“The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use surprises as an admission that we have no idea what may happen next […] This is true for scary events like recessions and wars, and great events like innovations.”

Housel warns against simplistic interpretations of history, noting that some of the most financially-consequential historic events were unusual and unpredictable. The author uses this observation to argue that people should always be financially prepared for surprising events and not overestimate their own knowledge about the world and finance.

“Benjamin Graham is known for his concept of margin of safety. He wrote about it extensively and in mathematical detail. But my favorite summary of the theory came when he mentioned in an interview that ‘the purpose of the margin of safety is to render the forecast unnecessary.’ It’s hard to overstate how much power lies in that simple statement.”

In order to weather surprises and bad luck, Housel advocates for a “margin of safety” that will protect you from financial ruin if investments go wrong. This plan can make financial forecasting “unnecessary,” since you do not have to feel anxious about something unexpectedly going wrong with your assets or investments.

“We should avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret.” 

Again, Housel urges the reader away from extreme thinking in their financial planning. This quotation underlines Housel’s commitment to moderate financial thinking and his penchant for veering away from the dramatic to explore how everyday choices can have beneficial outcomes in the long term.

“It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor […] Market returns are never free, and never will be. They demand you pay a price, like any other product.”

Housel argues that readers, in particular people new to investing, should expect that some of their stocks will result in losses. Housel urges the reader to not be spooked by losses, but to view them as a fee that you would pay to access any service. As such, people need to keep their investments long enough for them to begin to make money even if it means weathering occasional losses.

“The formation of bubbles isn’t so much about people irrationally participating in long-term investing. They’re about people somewhat rationally moving toward short-term trading to capture momentum that had been feeding on itself [. . .] Profits will always be chased.”

Housel does not judge investor behavior during bubbles, instead seeing their investments as a logical way to try to quickly make money in short-term trades. This quotation connects to Housel’s non-judgmental attitude toward finance, as well as his argument that people should distinguish between the varying goals of short- and long-term traders.

“A takeaway here is that few things matter more with money than you understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. The main thing I recommend is going out of your way to identify what game you’re playing.”

Housel advises the reader to approach their financial decisions with a clear notion about their own goals. This passage implies that although a lot of financial advice is presented as a one-size-fits-all, in reality, people have their own preferences and priorities which should dictate their financial decisions. Again, Housel underlines the importance of self-awareness for the reader.

“Growth is driven by compounding, always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant […] The short sting of pessimism prevails, while the powerful pull of optimism goes unnoticed. […] In investing you must identify the price of success—volatility and loss amid the long backdrop of growth—and be willing to pay for it.”

Housel observes that people are wired to focus on negative events rather than appreciate the positive—but time-consuming—process of compounding and growth. This quotation persuades the reader to not become overwhelmed by negative events and setbacks, but to pay equal attention to the benefits they will enjoy over a long period of time.

“When thinking about room for error in a forecast it is tempting to think that potential outcomes range from you being just right enough to you being very, very right. But the biggest risk is that you want something to be true so badly that the range of your forecast isn’t even in the same ballpark as reality.”

Housel claims that people’s desire for a certain outcome can lead to biases that affect their ability to make decisions. This passage advises the reader to always consider the possibility that their instincts may be incorrect when making an investment. This quotation ties in with Housel’s advice to maintain margins of safety and understand that surprises are an unavoidable part of life.

“We all want the complicated world we live in to make sense. So we tell ourselves stories to fill in the gaps of what are effectively blind spots […] When I’m blind to how parts of the world works I might completely misunderstand why the stock market is behaving like it is, in a way that gives me too much confidence in my ability to know what to do next.”

Similar to the biases which can impact our judgment, we also all have “blind spots,” or aspects of the world that we do not understand. The more self-aware we are about our lack of knowledge, Housel asserts, the more we can avoid a false sense of confidence that could lead to dangerous decisions.

“Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune, because a small minority of things account for the majority of outcomes. No matter what you’re doing with your money you should be comfortable with a lot of stuff not working.”

Housel advises the reader to maintain a diverse selection of investments in order to raise their chances of success. With many investments, only a few need to succeed substantially while the others can perform averagely or poorly. This quotation is especially relevant to new investors who may feel uncomfortable with the low success rates of many of their stocks.