In the Psychology of Money, Morgan Housel teaches you how to have a better relationship with money and to make smarter financial decisions. Instead of pretending that humans are ROI-optimizing machines, he shows you how your psychology can work for and against you.
It’s easy to convince yourself that your financial outcomes are determined entirely by the quality of your decisions and actions, but that’s not always the case. You can make good decisions that lead to poor financial outcomes. And you can make bad decisions that lead to good financial outcomes. You have to account for the role of luck and risk.
To mitigate the risk of overweighting the role of individual effort in determining outcomes:
“But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.”
Be kind to yourself when you make a mistake or end up on the wrong side of risk. The world is uncertain, and it may not be your fault if something goes wrong.
“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 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 relied upon to repeat indefinitely.”
Getting money and keeping money are two distinct skills. While getting money necessitates risk taking, hard word, and an optimistic disposition, keeping money is a different skill. It requires you to mitigate risk, avoid getting greedy, and to remember that things can be taken from you at any moment.
“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.”
Having more flexibility and control over your time is far more valuable than getting another 2% on your returns by working all-nighters or making speculative bets that impact your sleep.
If you’re rich, you have a high current income. But being wealthy is something different – wealth is not visible. It’s the money that you have that’s not spent. It’s the optionality to buy or do something at a future time.Being rich offers you opportunities in the short-term, but being wealthy provides you the flexibility of having more of the items you want – freedom, time, possessions – in the future.
As humans, we tend to underestimate how much our personality and goals will change with time. This makes long-term financial planning hard. We may think we’ll never have kids or a big house when we’re young, so we plan as if that’s the case, but then we find ourselves with a house and kids that the plan didn’t account for. So when thinking about your investment strategy, try to account for the unknown.
