the classic wanderer

The Psychology of Money - Book Summary

The book that made me rethink my perspective towards money.
04 Jul 2021 · 10 min read

Table of Contents

    Author: Morgan Housel


    🖌 This book in one paragraph

    People have a complex relationship with money. Most of us learn the technical skills in finance; from how to gain profits for your investment, how to save for retirement, to how to manage your personal finance. However, it’s equally important to understand how we, as humans, behave towards money. In reality, people don’t make financial decisions on a spreadsheet but are mostly influenced by their emotions, ego, and bias. In this book, you can’t expect to have much technical knowledge in finance or jargon, but you’ll find more insights about the fundamental human bias and behavior presented in very simple terms. The author uses 19 short stories that explore the strange ways people think about money, which helps us make sense of the main idea presented in each chapter.


    🚶‍♀️Who should read this?

    • If you are making bad financial decisions, read this.
    • If you are not making bad financial decisions—well, read this too. This book will help you understand the reasoning behind some of the financial decisions you make and help you prevent making bad ones in the future.
    • Anyone who wants to get started learning basic finance.
    • Anyone who wants to learn about human behavior in general because I personally think some of the psychological insights are not only applicable for money, but for other aspects in life as well.


    💥 How has this book changed me?

    • It made me be a better decision-maker in my financials. This book helped me combine my technical knowledge in finance while nudging me to consider the human bias and impulses that I have. As a result, it made me a better “Financial Manager” for my personal finance and my business.
    • It gave me perspective on happiness, greed, ego, as sometimes it’s not only about what you know, but also how you behave.
    • As youth, we are accustomed to learning ways on how we can generate income, but oftentime we neglect how we can maintain our wealth, which are two entirely different skill sets. Because of this reminder, I am now more mindful about how I should maintain my wealth as well.
    • The concept of compounding. Man, the chapter that explained why Warren Buffet was a successful investor because of his age really hit me. As a result, I now start to just do things as early as I can and not wait until it’s ‘perfect’ (what is the definition of perfect, anyway?). This mindset is applicable not only in the finance, but also in other aspects of life. 


    💬 Some highlights

    • People act based on their experiences, not yours, so don’t judge.

    Every person is a product of their environment that comes from very different backgrounds and situations. Some people may live in an era that went through extreme inflation, some live in a time where the economy is much stable. We, the Millennial Generation may live in a different economic situation from the boomers and Generation Z. Because of that, we need to acknowledge that the way we think the world might be entirely different from how another person sees it. It’s just how it is.

    Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.


    • Warren Buffet has one advantage in his investment journey: starting early.

    Warren Buffet started serious investing when he was 10 years old. In this book, the author tried to compare his journey with a very capable investor, Jim Simons, Head of the Hedge Fund Renaissance Technologies. Jim Simmons compounded money at 66% annually since 1988 and the author claimed no one comes close to his record. However, even when he has this advanced skill, his net worth is still way below Waren Buffet. Warren Buffet could have been an ordinary investor if it weren’t for his time.

    This is actually applicable to other aspects of life. Most of the time, we all wait for us to be ‘perfect’. While waiting for that perfection, we are actually losing the other advantage which is time. Of course, this needs to be taken into context, as some fields (like becoming a doctor or lawyer) required us to reach a certain threshold first before we are ready to enter the game. However, some areas like starting a small business or investing can benefit from starting early, as your skills and learnings from your error will compound along the way.

    It’s not about blindly starting for the sake of starting, but it’s about being taking advantage of time.

    Let us try to reaffirm ourselves:

    I won’t wait till I have the perfect writing skill to start a blog.
    I won’t wait until I have an MBA degree to actually start a business.
    I won’t wait until I am super-rich to be able to try investing.

    In conclusion,
    I will start early so I can benefit from the compound in the long run.


    • Getting wealthy. vs. staying wealthy are two different skill sets. Most people only focus on the first.

    This is singlehandedly one of the MOST important lessons in this book. Most lessons in finance nowadays focus on how you can earn more income or generate higher investment returns. However, few discuss how you can maintain your wealth, or simply how to not make a bad financial decision. This is where greed can easily come in, and steer you in the wrong direction. The author shared a short story that illustrates this situation where it described two professional investors who have the same money gain from an investment but decided to maintain it in two different ways. Both ended with two completely different endings.

    Getting money is one thing. Keeping it is another.


    • Okay, but what do people want out of money? On why we should still save money despite not having a to-buy bucket list.

    People actually don’t want money. People want money because they want to buy freedom. They want to have control over their time.

    “Controlling your time is the highest dividend money pays.”

    There is a chapter that explained why money should be saved although there’s no visible goal at the moment. Money has to be saved not because one aims to buy a new car or achieve a certain goal, but rather it helps to buy one of the most valuable of all things—TIME.


    • Wealth is actually what you don’t see. Don’t spend money to show you have money.

    One of the most powerful ways to increase your savings isn’t to raise your income, it’s to raise your humility.

    This is actually basic logic that is rarely talked about. A lot of people want to impress others by using expensive features. However, buying those stuff technically made your wealth less.

    Savings = Income – Ego


    • It doesn’t take a genius with formal intelligence to know how to use money wisely.

    A genius who loses control of their emotions can be a financial disaster. 

    The opposite is also true.

    Ordinary people with no formal financial education can be wealthy IF they have a handful of behavioral skills that can help them control the money, and this has nothing to do with formal training.

    So now you don’t have a formal financial education, can you panic? Not quite. This quote reflects upon several stories in the book about how some professional investors and notable CEOs ended up on the wrong side of the coin because of their inability to control their financial impulses. 


    • Do not just set goals. Always leave room for error.

    Imagining a goal is relatively easy and fun. However, imagining a goal in the context of the stress that comes with real-life is something entirely different. Over time you’ll have different wants, different needs, and even face different circumstances. You’ll even live in a different economy. People are poor forecasters of their future selves, so always leave room for error in your financial goals.


    • Greed is real, you can be never enough.

    This book explored stories where crazy rich people did crazy things with money where it ended up bad. Hopefully, we can learn from their mistakes on how greed took a toll on them. It was indeed an expensive lesson learned.


    • We are often too bogged down in what’s happening in the short run and do not realize that we’re making progress in the long run.

    Progress happens too slowly to notice, but setbacks happen too quickly to ignore. It’s easy to get pessimistic about our progress. In life and investing, optimism is needed more than pessimism in the long run.


    👾 Cool quotes

    • Controlling your time is the highest dividend money pays.
    • Doing well with money has little to do with how smart you are and a lot to do with how you behave.
    • A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.
    • We all think we know how the world works. But we’ve all only experienced a tiny sliver of it.
    • Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.
    • 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.
    • Everything has a price, but not all prices appear on labels.
    • Beware of taking financial cues from people playing a different game than you are.
    • No one is impressed with your possessions as much as you are.


    All in all, I do enjoy reading the book!



    Sabrina Anggraini

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