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Life-Changing Lessons from the Psychology of Money

The Psychology of Money is a financial book authored by Morgan Housel, an award-winning author who published it on September 8, 2020. He presents 19 short stories in the book that explore the bizarre ways individuals think about money and show you how to better understand one of life's most essential themes. Morgan Housel has been publishing about financial matters since 2008. Through his research, he established that serendipity and human behaviour have a much greater influence on financial performance than analysis and spreadsheets.

In this book, he presents 18 related biases, flaws, habits, or attitudes that impact financial outcomes through a series of short vignettes and chapters that reveal his views, opinions, and approach to money. Human interference can frequently result in unpredictable markets and unanticipated disasters that damage the market. This human intervention and the human emotions linked with markets must be taken into account. It teaches money the way psychology should be taught, with an emphasis on the emotional and behavioural components of investing.


This book looks at personal finances from the perspective of human behaviour, and it is full of anecdotes and real-life situations to keep you interested and help you connect the concepts you have studied. Many personal finance books focus on exogenous concerns, such as how the stock market works and how to select stocks and create a portfolio, while Housel's concentration is on the interaction between people and money—with special attention on the human aspect in the equation.


You do not need to study interest rates to understand why individuals get themselves into debt; you just need to look at the history of greed, insecurity, and optimism. The thesis of this book is that being successful with money has less to do with intelligence and more to do with behaviour. The book is divided into chapters, and we will focus on the first three in this article.

No One's Crazy


This is the book's opening chapter, and it considers the boundaries of our knowledge as well as the limits of our personal experiences. There is a big disconnect between firsthand experiences and how we use those restricted insights to make sense of the world. Our experiences shape our opinions, yet the basis of those opinions is shaky, imperfect, and riddled with flaws.


Consider the attitudes of two people born in two distinct decades, one in the 1950s and the other in the 1970s, concerning the stock market. In the 1960s, the first individual would have witnessed terrible stock market returns as a teenager and a young adult. As a young adult, the second individual would have witnessed the double-digit returns of the 1980s and 1990s. The latter is more likely to have an optimistic outlook about stocks when they reach maturity. After two decades of insignificant returns, the former is likely to be dubious of the stock market. In this chapter, the author demonstrates that the impact of personal experience on your decision-making process, as well as the unique set of circumstances that influence the decisions of others, cannot be overlooked.


Luck and Risk

Our finances have a significant impact on our life. Despite this, few individuals talk about them or educate themselves on the subject. As a result, many misconceptions and incorrect concepts about money have developed over time. Individuals believe that having money is a result of luck or that all wealthy people are heirs. Housel demonstrates in this chapter that it is tempting to believe that the quality of your decisions and actions determines your financial outcomes totally, but this is not always the case. It is possible to make sound decisions that result in negative financial outcomes. You can also make poor judgments that result in unfavourable financial outcomes.

To be more impartial, avoid drawing conclusions from extreme examples, which are likely to be significantly influenced by chance/risk and difficult to replicate. Consider larger trends in several settings and remember that things are rarely as good or bad as we perceive.


Do not make snap decisions about people, including yourself. As an investor, avoid taking large risks in the hopes of getting the best possible profits. Extend your time horizon by aiming for decent returns that can be sustained over time: start as soon as possible and wait for the money to increase. To avoid overemphasizing the importance of individual effort in deciding outcomes:

  1. You must be mindful of the people you admire and despise. Those at the top may have benefited from luck, while those at the bottom may have been exposed to danger.

  2. You should pay less attention to individuals and instead concentrate on larger patterns. It is tough to duplicate successful people's results, but you might be able to join in larger patterns.

  3. Be gentle with yourself if you make a mistake or find yourself on the wrong side of a risky situation.

Never Enough

A plan is only useful if it can withstand the test of time. And everyone's reality is a future riddled with unknowns. If you are relatively young and earn more than you spend, investing the majority of your money in a diversified portfolio of low-cost index funds is the greatest approach to maximize your long-term investment returns.


The book teaches us that risking what you have and need for what you do not have and need is never a good idea. Investors often look up to others who have more than them and become so convinced that they need what they have that they take excessive risks and lose money. It is a highly recommended book for anyone who has recently begun earning.

The book is jam-packed with useful information. Some lessons warn us against particular actions, while others urge us to adopt healthy habits. This book will not only provide you with a thorough understanding of investing instruments and tax-advantaged tactics, but it will also help you improve your relationship with money and attitude toward personal finance.


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