The Psychology of Money – Book Excerpts

“Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see. So, wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future. No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today.” –Morgan Housel

The Greatest Show on Earth

Doing well with money has little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach.

A genius who loses control of their emotions can be a financial disaster. The opposite is also true.

  • Financial outcomes are driven by luck, independent of intelligence and effort.
  • Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.
  • To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism. To get why investors sell out at the bottom of a bear market you don’t need to study the math of expected future returns; you need to think about the agony of looking at your family and wondering if your investments are imperiling their future.

No One’s Crazy

People have different views about money.

  • You know stuff about money that I don’t, and vice versa. You go through life with different beliefs, goals, and forecasts, from what 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.
  • We all do crazy stuff with money because we’re all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy — we all make decisions based on our own unique experiences that seem to make sense to us.

Luck & Risk

Nothing is as good or bad as it seems.

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other.

Never Enough

There is no reason to risk what you have and need for what you don’t have and don’t need.

The hardest financial skill is getting the goalpost to stop moving. (Happiness = Results – Expectations)

Social comparison is the problem here.

The ceiling of social comparison is so high that virtually no one will ever hit it.

“Enough” is not too little but it is realizing that an insatiable appetite for more will push you to the point of regret.

There are many things never worth risking, no matter what the potential gain is:

  • – Family & Friends
  • – Reputation
  • – Freedom
  • – Being loved by those who you want to love you
  • – Happiness

all are invaluable. Keeping these things is knowing when it’s time to stop taking risks.

Confounding Compounding

Lessons from one field can teach us something about unrelated fields.

Take the billion-year history of ice ages, and the lesson about growing our money – “It is not necessarily the amount of snow that causes ice sheets but the snow, however little, lasts”.

It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.

That’s when compounding runs wild.

A small starting base can lead to results so extraordinary they seem to defy logic.

Getting Wealthy vs Staying Wealthy

Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.

Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risks. 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.

Tails, You Win!

Be ok with failures, they are the norm.

The great investors bought vast quantities of art, a subset of the collections turned out to be great investments, and they were held for a long period of time to allow the portfolio return to converge upon the return of the best elements in the portfolio.

It’s not whether you’re right or wrong that’s important but how much money you make when you are right and how much you lose when you’re wrong.

Investing genius: A person who can do the average things when all those around them are going crazy.


The ability to do what you want, when you want, with whom you want, for as long as you want, is priceless.

It is the highest dividend money pays.

Reactance: Doing something you love on a schedule you can’t control can feel the same as doing something you hate.

Man In the Car Paradox

When we see someone driving a luxury car, people rarely think, “Wow, the guy driving the car is cool.”

Instead, “Wow, if I had that car people would think I’m cool.”

No one is impressed with your possession as much as you’re.

Wealth is What You Don’t See

Riches are displayed. Wealth is hidden.

We tend to judge wealth by what we see because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Instagram photos.

The truth is that wealth is what you don’t see. Wealth is the nice cars not purchased. The diamonds were not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

Save Money

Less ego -> more savings

A high-savings rate means having lower expenses than you otherwise could and having lower expenses means your savings go farther than they would if you spent more.

Spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money. Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.

“Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.” –Morgan Housel

Reasonable >> Rational

Aiming to be mostly reasonable works better than trying to be coldly rational. We are humans.

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 money.


History is the study of change, ironically used as the map of the future.

We can’t just make the decisions just by looking at history. Life is full of unexpected surprises.

“Things that had never happened before happen all the time.” –Morgan Housel

Room For Error

The most important part of every plan is planning on your plan not going according to plan.

The odds are in your favor when playing Russian Roulette. But the downside is not worth the potential upside.

“The most important part of every plan is planning on your plan not going according to plan.” –Morgan Housel

You’ll Change

Expect your future self to change

When you consider our tendency to change who we are over time, balance at every point in your life becomes a strategy to avoid future regret and encourage endurance.

We should also come to accept the reality of changing our minds. Some of the most miserable workers I’ve met are people who stay loyal to a career only because it’s the field they picked when deciding on a college major at age 18.

Nothings Free

Every job looks easy when you are not the one doing it.

Market returns are never free and never will be. They demand a price. But if you view the admission fee as a fine, you’ll never enjoy the magic.

Everything has a price, not all appear on labels.” –Morgan Housel

The Seduction of Pessimism

Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.

Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.

There are two topics that will affect your life whether you are interested in them or not: money and health. While health issues tend to be individual, money issues are more systemic.

When You’ll Believe Anything

Beware of your stories. Stories trump statistics.

Carl Richards writes: “Risk is what’s leftover when you think you’ve thought of everything.”

We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs.

You and Me

Avoid taking financial cues from people playing a different game than you are.

“Medicine is a complex profession and the interactions between physicians and patients are also complex.” You know what profession is the same? Financial advice. I can’t tell you what to do with your money, because I don’t know you. I don’t know what you want. I don’t know when you want it. I don’t know why you want it.

Charlie Munger once said “I did not intend to get rich. I just wanted to be independent.”


Sandy Gottesman, a billionaire investor who founded the consulting group First Manhattan, is said to ask one question when interviewing candidates for his investment team: “What do you own, and why?”

“Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.” –Morgan Housel


  • Everyone has different financial goals and definitions of financial freedom. Be careful when following others’ advice because we are all bound by different circumstances
  • Social Media and advertisement made us feel like we’re not enough and we need that “shiny object” in order to be happy. That makes us make irrational decisions with money and end up with debt
  • There’s no such thing as overnight success. It is compounded effort that succeed in one night. Observe the effort and process, not the result.
  • Be frugal with your money

Highly recommended, cause this book is not a typical financial advice book. The book explains why we spend money on something we don’t need based on emotional decision, not based on mathematical calculation.

From the book:-
The Psychology of Money by Morgan Housel

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