This article is about The Psychology of Money book summary by Morgan Housel. This book will surely provide an exciting and informative journey as it guides readers through why we make poor financial decisions and equips us with the strategies to make wiser ones.
Through memorable stories, the author gives insight into the bizarre ways people think about money and provides practical advice on approaching one of life’s most important topics. We hope this will equip you to make better choices and live more prosperous lives.
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What Does The Psychology Of Money Talk About?
Former Financial Journalist Morgan Housel discusses what psychology has to do with your financial success. This book will help you learn how your relationship with money affects every aspect of your finances.
It may seem like the more you know, the richer you get, but that is not always true. There are many financial resources, and some are easier to understand than others. Unlike other fields, a gas station worker with only a high school education could make millions, while a well-known finance executive with a Harvard degree could go bankrupt.
All that matters is how you act.
The Psychology of Money Book Summary
Knowing about money doesn’t guarantee that you’ll be rich. Vermont janitor and gas station attendant Ronald Read died in 2014, leaving behind a fortune of more than $8 million. Neither the lottery nor an inheritance had brought him wealth, and he set money away, invested it in reputable businesses, and allowed his wealth to accumulate over time.
An interesting irony is that a Harvard-educated finance executive heralded as a success story by a business magazine in his thirties eventually went bankrupt.
The stark differences in outcomes between one person’s success and another’s failure had nothing to do with their financial understanding but rather patience versus greed – a distinct characteristic of the finance industry.
A skilled surgeon will always do better than someone without any medical training. In finance, knowledge of complex rules may help you make better decisions, but there will always be a more significant element of luck and an individual’s behavior involved.
How Are Luck and Risk Related to Money?
Bill Gates’ success was partly because he attended a high school with computer access, and this was made possible only because of the efforts of a math and science teacher who convinced the Mother’s Club at school to use funds from rummage sales to rent it. He certainly got lucky with this one-in-a-million opportunity, and Gates acknowledges that he was able to start Microsoft with this high school experience.
Gates went to school with Kent Evans and was good friends with him. He was also lucky to work with Bill Gates in the school’s computer lab. But he never became a partner in Microsoft because he died in a climbing accident in high school.
It was one in a million that such a terrible thing could happen. Exactly how much of a factor luck plays in investing is something economist Robert Shiller would want to know more about.
Though luck plays a considerable role in investing, few would openly agree. To point out someone’s good fortune might make one seem envious. Believing that your success is due to luck can be disheartening and cause feelings of depression.
Very few people think about how luck and risk go together. When someone else suffers a setback, it’s usually the result of careless choices, but when you lose, it’s because you took an unnecessary risk. Like customer service, you can have clients who are always right- but need to know what they want.
Do not assume that only your hard work and judgment have a role to play in your financial success. Instead of relying on a magazine article about a billionaire for guidance, try to look at patterns and trends to make informed decisions regarding your finances.
Remember that a few successful stock picks can give you most of your income. It’s ok to make some mistakes along the way as long as your good stock choices outweigh the bad ones.
For example, venture investors assume that for every 50 investments made, 25 will fail and that the remaining 1–2 will provide sufficient returns to fund the business.
Investing in a start-up seems risky, but there is just as much chance of failure or success when you invest in big public companies. JP Morgan Asset Management studied the Russell 3000 Index and found that 40% of the stocks in it lost 70% of their value and were never able to regain them again.
Your Life Experiences Shape How You See The World And Money
National Bureau of Economic Research discovered that individual experiences substantially impact how people feel about money. Stock market investments are more common among persons who reached adulthood during a bull market than those who experienced a market crash.
Your life lessons may cause you to take logical steps that others may find utterly illogical. The meaning of risk to a child of wealthy parents is vastly different from that of a child of poor parents.
Many aspects of personal investing are relatively new additions, which is on top of the generational, cultural, and financial differences between people. Now commonplace in the US, the 401(k) plan appeared in 1978, and in 1998, Roth individual retirement accounts were introduced.
Your financial decisions are often shaped by your experiences with money and how you use specific finance tools. These choices are usually driven more by personal experience rather than being logically rational.
Understanding When Enough Is Enough Is A Crucial Lesson
Making financial decisions based on comparisons with how much money others have can be potentially destructive. People who are not content with what they possess may lose everything in pursuit of something more.
A former CEO of McKinsey, Rajat Gupta, was born into extreme poverty in Kolkata, India, but by 2008, he was worth $100 million. Unhappy with his earnings, he used confidential information to make an additional $17 million. The SEC’s case against him was easy, and he was immediately imprisoned.
Before Bernie Madoff’s two decades of fraudulent activity, he managed a legitimate and thriving investment firm that brought in over $25 million annually. By any measure, he was very wealthy. Yet, he needed more.
These two men lost what they had because their want for more was insatiable. Constantly striving to achieve a higher financial goal can become an ongoing process due to capitalism’s capacity to foster envy.
It isn’t very sensible to judge your financial situation against others. To succeed, one must be content with what they have, even if it is less than others.
Getting Wealthy vs. Staying Wealthy
Taking calculated risks is essential to financial success, but keeping your “humility and fear” will help you keep more of what you earn. Charlie Rose, a television journalist, talked to Michael Moritz, the head of the venture capital firm Sequoia Capital. While many other businesses fail within a decade, this one has been around for four.
If you ask Moritz why his company has lasted so long, it’s because of his fear of letting it go bankrupt. The company has to take risks to be profitable, but it doesn’t just assume past successes will happen again.
It’s important to remember that only some things will work out the way your plan estimates. This is why you should always calculate ample safety margins and be prepared for many unplanned events to prevent your ideal outcome. This plan will help you have a better chance of succeeding.
While analyzing the past can sometimes provide insight into the future, new, unprecedented occurrences are always a possibility. Consequently, investors who use only this forecasting method could take unnecessary risks by not preparing for the unknown.
In a fast-changing world, it doesn’t make sense to rely solely on past experiences. For instance, venture capital firms weren’t around when Phil Knight founded Nike. Trying to operate on knowledge from the old days won’t cut it anymore and is likely unproductive.
Never Take Financial Advice From Those Who Don’t Share Your Long-term Financial Vision
The power of saving small amounts of money over time is comparable to the exponential growth of hard drive storage, which increased by 30 million in the past 70 years. This shows that, counterintuitively, saving small amounts of money regularly can tremendously impact one’s eventual wealth.
Warren Buffett began investing 75 years ago when he was just 10 years old. By the time he was 30, he had amassed a net worth of $1 million. He emphasizes that investors should focus on making long-term investments with acceptable returns rather than attempting to find the one-in-a-million stock.
This advice is particularly relevant when considering the effects of bubbles on the market. Speculators often make decisions based on the actions of others, leading to an influx of capital and an eventual burst. Such was the case for the dot-com and housing bubbles, which wiped out a combined $14.2 trillion in wealth.
The notion that a stock has an “intrinsic value” is unreasonable. In 1999, paying $60 per share for Cisco stock might have been an excellent opportunity for day traders looking to profit quickly on the same day, and this price represented a 300% increase over the year. On the other hand, for long-term investors who followed the advice of day traders and bought the stock, it was a disastrous decision.
Is It Worth Getting Financial Advice?
It is important to remember that financial advisers possess essential knowledge, including “universal truths in money.” Nevertheless, it is ultimately up to each individual to determine which path to take. To help you determine your goals, consider the following points:
- Invest in your future, not your style – save money instead of showing it off! If you want to build wealth, you’ll need to practice self-discipline and stay away from indulgences. Even if you have a high salary, buying a flashy car or an expensive home will only prevent you from achieving financial success in the long run.
- Take calculated risks. If you are risk-averse and your choice of investment gives you sleepless nights of worry, you should consider re-evaluating your approach. Generally, higher-risk investments have the potential to bring greater returns, but this is not always the case.
- Make sure your money goals let you live the life you want. Having control over your life can bring a sense of joy and contentment. Even saving small amounts can give you the freedom to decide whether or not to go to work when feeling under the weather. Furthermore, more considerable savings can allow you to wait and find a job that suits your needs and desires better.
- Maximize your investment timeline. The best way to minimize your losses and maximize your gains is to give your investment more time to mature.
- Change the way you look at saving money. Putting some money aside for unforeseen circumstances is essential, as the future can bring unexpected challenges. Having a financial cushion can help you handle these challenges more efficiently and enable you to focus on finding solutions. Saving money now can provide the security you need to face the unknown.
- Understand your personal financial objectives. Make sure that you are the one in charge of your financial decisions. Don’t let anyone else, such as your financial advisor or a television commentator, tell you what to do with your money. Take the time to consider what is best for you and your future, and ensure that your choices align with your goals and objectives.