Book Notes: The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

Reading Time: 27 minutes

Morgan Housel - The Psychology of Money


The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, by Morgan Housel

Publisher : Harriman House (2020)

ISBN-13 : 978-0857197689



Quick Thoughts

People’s values, goals, and ideas around odds and risk-taking are all very different. Everybody has a reason for behaving the way they do around money, and no one is crazy or irrational. 

But there are principles and basic ideas that can help to provide guidance and direction. The Psychology of Money provides a framework to better understand how and why people think, feel, and behave the way we do around issues of money. It also helps us to think about why and how we save, the importance of time and compounding interest, the decisions we make, and how to survive and prosper in an unpredictable and constantly changing world. 

I recommend this book to people who want to make pretty reasonable personal finance and investing decisions that allow you to stay in the game and enjoy a non-stressful path to building wealth.


The Book in 3 Sentences

  • Financial success depends more on your psychology and how you behave than how intelligent or talented you are. Being intelligent or skilled is helpful, but a person’s psychology and behavior has more of an influence on their financial wellbeing.
  • Time is the most powerful force in investing. Don’t underestimate the power of compound interest and exponential growth. Small amounts of money, invested consistently over years and decades, can grow into extraordinarily large amounts. It’s tempting to pursue risky and speculative opportunities that garner very high returns. But these opportunities are often risky and the high returns are not easily repeated year over year. The secret of compound interest is time and patience; small efforts can translate into large returns over time. 
  • Wealth is income that is saved (and invested), not spent. Wealth is an option not yet taken to buy something later. Its value lies in accruing assets  that grow in value to provide you with even more options, flexibility, and growth in the future than you could acquire now. Wealth is the thing we choose not to spend. Wealth is what we don’t see.


5 Key Takeaways

  • Not every action in your financial life will result in success. There will always be mistakes and failures that occur over the course of a financial life. You need to ensure that you’re able to survive and stay in the game. You should arrange your financial life in such a way that the occasional bad investment or mistake doesn’t wipe you out completely. This is similar to Nassim Taleb’s concept of the barbell strategy.
  • Compound interest is a powerful force for growth and financial success. It takes advantage of the magic of time; small amounts invested steadily over decades will grow into a huge fortune.
  • The greatest intrinsic value of money is its ability to give you control over your time. And having control of one’s time is one of the most significant sources of happiness. 
  • Wealth is what you don’t see. It’s the fancy cars not purchased. It’s the pricey clothes not bought, expensive vacations not taken. Wealth lies in accumulating financial assets that grow over time. It’s invisible to others – and resides in people’s financial portfolios – retirement accounts, savings accounts, brokerage statements, etc.
  • The world is full of surprising events. Nobody has any idea what is going to happen next. You’re unlikely to predict the major events (like World War II or the 2020 coronavirus pandemic) that change the economy and the world the most. Additionally, history doesn’t account for the fact that things change. Understand the past but don’t use it as a perfect predictor for exactly what’s going to happen in the future. 


Top Quotes

  • You go through life with different beliefs, goals, and forecasts, than 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. (11)
  • The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor. (29)
  • If something compounds—if a little growth serves as the fuel for future growth—a small starting base can lead to results so extraordinary they seem to defy logic. (38)
  • “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.” (47)
  • But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now. (72)
  • “…what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising” [Daniel Kahneman] (92)


Extended Summary

Chapter 1: No One’s Crazy

  • Financial literacy and success has little to do with math, formulas, education or intelligence. It is a soft skill that depends largely on human behavior and psychology.
  • People have different beliefs, values, and experiences that influence the way they behave around money. Every action people take around money is rationalized or justified by their own personal set of values, beliefs and experiences.
  • People’s behavior around money is also greatly shaped by the state of the economy around the time of their early adulthood years.
  • Many of the major forces shaping decisions around savings and debt are relatively new – college, retirement as a concept, credit cards, the 401(k), and index funds.
  • “Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.  (15)


Chapter 2: Luck & Risk

  • Some people get lucky. Other people experience bad luck. Luck and risk reflect the reality that outcomes in life can be arbitrary and not solely dependent on individual effort. The world is too complicated for one person’s actions to completely dictate 100% of his or her outcomes. 
  • In many instances, luck and risk may have more of an impact on one’s outcomes than one’s own deliberate actions. Therefore, be careful how you evaluate other people’s (or your own) financial success. Things are never as good or as bad as they may appear. 
  • Avoid taking lessons from extreme outcomes because it’s very likely those extreme outcomes were shaped by extreme ends of either luck or risk. 
  • In order to derive actionable takeaways from financial success,  search for general and broad patterns of success and failure. Patterns that are common across many sectors are more likely to be applicable to your own life. 
  • The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor.  (29)
  • The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money. (27)


Chapter 3: Never Enough

  • How do you know when you have enough (wealth, income, power, prestige, other measures of success)?
  • Bernie Madoff’s legitimate, non-fraudulent business was hugely profitable, and made him extremely wealthy. But it wasn’t enough for him. He embarked on a huge Ponzi scheme that led to his arrest and conviction, a prison life sentence, and the destruction of his family. 
  • Some people are rarely satisfied. Despite possessing significant wealth, power, prestige and freedom, their dissatisfaction leads them to desire even more, and to pursue increasingly risky opportunities.
  • This is a dangerous treadmill that causes perpetual dissatisfaction. It’s a game that can never be won because there will always be one more thing to chase. And the pursuit can lead one to risk valuable things like your reputation, freedom, family, friends, and your happiness. These are invaluable attributes you risk with a constant desire for more.
  • It is important to know when one has enough, and not chase after every single additional dollar. Stop constantly moving goalposts, and recognize when you’ve won the game.
  • There is no reason to risk what you have and need for what you don’t have and don’t need. (33)
  • … the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you.  (34)


Chapter 4: Confounding Compounding

  • Compound interest is the addition of interest to the principal sum of a loan or deposit, ie, it’s interest that accumulates on interest from prior periods. It is the result of reinvesting interest. The longer the time period, the more powerful the compounding as it accumulates exponentially over time. 
  • Compound interest is not very intuitive because it’s not easy for people to understand exponential growth. People can understand linear growth: e.g. it’s easy to understand that 10+10+10 =30. But, it’s much harder to grasp that 10x10x10 =1,000. That’s exponentially larger.
  • The miracle of compound interest is that small amounts of money, invested consistently over long periods of  time, can grow into extraordinarily large sums. 
  • Although he is a skilled investor, much of Warren Buffet’s investment success is because he started seriously investing at age 10. He’s now 90 years old, so his investments have had about 80 years to compound.
  • Saving and investing from an early age helps to build good financial habits and enables compound interest to snowball and grow your money over time. Much of investment success is due to time and the effects of compounding. It’s not about striking it rich quickly, it’s about being patient and sticking with steady returns over long periods of time.
  • If something compounds—if a little growth serves as the fuel for future growth—a small starting base can lead to results so extraordinary they seem to defy logic. (38)


Chapter 5: Getting Wealthy vs. Staying Wealthy

  • Getting wealthy and remaining wealthy are two separate things. They require two different skills. 
  • Getting wealthy requires a person to be optimistic and risk-taking. Staying wealthy requires a combination of frugality and paranoia.
  • Financial success requires being able to survive long enough for compound interest to take advantage of time and snowball your investments into a large fortune. Compounding only works if you’re able to give an asset decades to grow. Survival is a key strategy for financial success.
  • Engaging in risky or speculative behavior to win large returns could result in financial ruin, which interrupts the compounding process and makes it harder for investments to grow.  Even without engaging in risky bets, throughout one’s financial life, there will always be unpredictable ups and downs that everyone inevitably experiences. Compounding requires being able to stay in the game long enough without being wiped out.
  • The survival mindset requires three things:
    • (1) wanting to be financially unbreakable more than wanting big (risky) returns. Repeated steady and stable returns over time perform beter than risky bets that can financially ruin you and are hard to repeat year over year.
    • (2) Be flexible and have room for error. Life is unpredictable, so your financial plan should not be dependent on everything going exactly according to plan. Your financial plan should have a margin of safety. This might include being frugal and living within your means, being flexible in your thinking, a flexible timeline, or anything that enables you to be satisfied with a range of outcomes
    • (3) a barbelled personality where you’re optimistic about the future (up and to the right!), but paranoid about the obstacles that might prevent you from getting to that future. For instance, it’s believing that the global economy is always going to grow in the long-term, but being paranoid about short term economic outlooks.
  • 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. (45)
  • Nassim Taleb put it this way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.” (47)
  • You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive. (49)


Chapter 6: Tails, You Win

  • A tail event is something that is far away from the average; far enough that its theoretical probability of occurrence is very small. But, when it occurs, it can have tremendous influence in a society. 
  • For instance, WW2, the 2008 financial crisis, the 2020 coronavirus pandemic are all tail events that had significant and lasting effects in all aspects of society
  • Most of the stock market’s gains are driven by only a few, extraordinarily successful public companies. Their success is a tail event. Most public companies are failures, a few do well, and a handful become extraordinary winners that make up the majority of the stock market’s returns. This is why picking individual stocks is a fool’s errand, and buying index funds, (funds that track all public stocks) is the better strategy.
  • Tail events occur even within successful companies. Amazon’s growth is almost entirely because of Prime and Amazon Web Services (AWS). Most of Apple’s profits are due to a single product – the iPhone. Much of Google’s revenue comes from Google Ads. 
  • It’s hard for people to grasp the power and significance of tail events because failure is invisible. We underestimate how normal it is for many things to fail. In many fields, we only see the finished product, not the mistakes, failures, or losses that led to the tail-success product. These highly visible home runs make us believe that success is easy and inevitable, and therefore predictable.
  • Most music albums are flops, but the record labels are profitable because the hits from major artists allow them to recoup their costs incurred on niche artists. Hollywood operates the same way. The big hits subsidize the majority of the flops.
  • Many comedians test out their material in small clubs before performing them in major venues. Chris Rock’s Netflix specials are funny and flawless. What you don’t see are the hours he spends practicing and discarding bad material in small comedy clubs. The Chris Rock that performs in small clubs is not nearly as polished as the one you see on Netflix. 
  • When you purchase index funds, you’re not picking and choosing winners and losers. You’re buying the whole basket (of stocks). Most will fail, but the huge returns of the extraordinary few will generate steady growth. So you can be wrong half the time, and still grow wealthy. 
  • Your success as an investor is also determined by tail events; how you act during moments of market panic and terror. Your behavior in a crisis will have a greater impact than what you do on the average days. How you behaved in March 2020 during a 30% market drop will have more of an impact than what you did on the regular market days.
  • Two takeaways:
    • Buy and hold index funds, rather than engage in individual stock picking
    • Keep your head, especially on the days when everything is going crazy.
  • “The great investors bought vast quantities of art,” the firm writes. “A subset of the collections turned out to be great investments, and they were held for a sufficiently long period of time to allow the portfolio return to converge upon the return of the best elements in the portfolio. That’s all that happens.” (52)
  • Over the course of your lifetime as an investor the decisions that you make today or tomorrow or next week will not matter nearly as much as what you do during the small number of days—likely 1% of the time or less—when everyone else around you is going crazy.. (57)


Chapter 7: Freedom

  • A common denominator of happiness is freedom and autonomy; the ability to control one’s own life. Happiness ultimately comes down to being able to do what you want, when you want, and with who you want, for however long you want to do it.
  • Money, or financial independence, is the tool that provides this sense of freedom and control that leads to happiness. Money gives you the ability to exert control over your own time. Money allows you to buy time and provides options.
  • In modern society, the knowledge society means that more people are working with their minds, as opposed to doing things with their hands. Because knowledge jobs require thinking, the knowledge worker is never fully off the clock, unlike a factory worker.
  • Compared to earlier generations, modern knowledge workers have reduced control over their time. As a result, despite increasing wealth, many people are unhappier than ever. 
  • Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy. (62)
  • Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time. (62)


 Chapter 8: Man in the Car Paradox

  • People buy expensive things (cars, clothes, jewelry, mansions, etc) usually because they want the admiration and respect of others. But it usually doesn’t work. People who are impressed by fancy cars bypass admiring the driver of the fancy car and instead imagine themselves driving that fancy car. They may respect the car, and imagine it being theirs, but have little consideration for the actual owner. 
  • People generally desire respect and admiration; it’s hard to grasp that using money to buy impressive things brings much less respect or admiration than one may think.
  • “You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.”  (69)


Chapter 9:  Wealth is what you don’t see

  • We see the outward trappings of success – cars, homes, jewelry, etc – and judge those who possess such things to be wealthy. 
  • But wealth is merely accumulated assets; it is the assets not spent. So, wealth is what we do not see – appreciating assets such as savings and retirement accounts, brokerage statements, etc. Those things are invisible to outsiders. 
  • There’s a difference between being rich and being wealthy. Being rich is a static measure at a point in time. It’s easily seen – in the cars bought, pricy jewelry and expensive vacations. But wealth is a variable that accrues over time. It’s hidden. It’s in the savings, retirement accounts, or investment portfolios. 
  • We understand what rich people do. It’s highly visible. It’s harder to see wealth because it is, by definition, an option that’s waiting to be exercised. It’s difficult to learn from what you can’t see, and hence, the hidden nature of wealth makes it difficult for others to learn and imitate wealthy behavior. 
  • Wealth creates a gap between what one could do and what one chooses to do that accumulates over time. 
  • But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now. (72)
  • The danger here is that I think most people, deep down, want to be wealthy. They want freedom and flexibility, which is what financial assets not yet spent can give you. But it is so ingrained in us that to have money is to spend money that we don’t get to see the restraint it takes to actually be wealthy. And since we can’t see it, it’s hard to learn about it. (72)


Chapter 10: Save Money

  • Your savings rate is the percentage of your income that is not spent. Saving money and being frugal are more in your own control than your income and investment returns. How much you can save (and invest) highly determines how much wealth and financial independence you can achieve.
  • Being able to keep your desires and wants (your ego) in check enables you to achieve a high savings rate. A high savings rate means you have lower expenses, and therefore a greater future option to exercise should a need arise.
  • Savings is the gap between your income and your ego; not caring what others think helps keep your spending in check and enables you to save more and grow your wealth faster.
  • Reasons to save:
    • Life is unpredictable and savings create a buffer of safety to help you deal with the unpredictable shocks that happen to most of us throughout our lives.
    • It provides you with options and flexibility: to change careers, retire early, be free of worry and stress, etc
    • It provides you with more control over your time
  • Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment. (77) 
  • Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms. (77) 
  • When you don’t have control over your time, you’re forced to accept whatever bad luck is thrown your way. But if you have flexibility you have the time to wait for no-brainer opportunities to fall in your lap. This is a hidden return on your savings. (78) 
  • If you have flexibility you can wait for good opportunities, both in your career and for your investments. You’ll have a better chance of being able to learn a new skill when it’s necessary. You’ll feel less urgency to chase competitors who can do things you can’t, and have more leeway to find your passion and your niche at your own pace. You can find a new routine, a slower pace, and think about life with a different set of assumptions. The ability to do those things when most others can’t is one of the few things that will set you apart in a world where intelligence is no longer a sustainable advantage. (79) 


Chapter 11: Reasonable > Rational

  • People aren’t spreadsheets. We are messy and emotional, and we often make  decisions based on our emotions instead of using facts, logic, or spreadsheets. No one can be perfectly rational 100% of the time.
  • Instead of trying to be 100% rational when making financial decisions, a better target is to aim for being pretty reasonable. It’s more realistic and we’re more likely to stick with that instead of being perfectly rational all the time.
  • There’s also a rational reason to approve of some irrational decisions.
  • For instance, buy and hold is a boring but successful strategy. It requires you to do nothing. But people have a bias for action. It’s fine to use a small percentage of your net worth to engage in day trading and individual stock picking, as long as the majority of your portfolio is held in more diversified investments. It scratches the itch for action, so you can leave your diversified portfolio alone.
  • Day trading and picking individual stocks is not rational for most investors—the odds are heavily against your success. But they’re both reasonable in small amounts if they scratch an itch hard enough to leave the rest of your more diversified investments alone. (86)


Chapter 12: Surprise!

  • We use past events to try to predict the future, but the truth is that nobody has any idea what’s going to happen next! I’m writing this in the midst of a global coronavirus pandemic that absolutely nobody specifically predicted to happen in 2020. The world is unpredictable, random, chaotic, and volatile. Change is the only constant. 
  • Historians are not prophets, and the past isn’t necessarily a good predictor of the future.
  • This has two important implications:
    • (1) You’re likely to fail to predict the tail or outlier events (Black Swans) that move the needle in the economy and the stock market the most. 
      • Eg.  (Negative Black Swans):  The Great Depression, World War II, 9/11, The 2008 Great Recession, the 2020 Covid-19 global pandemic, etc
      • Eg. (Positive Black Swans): Vaccines, Antibiotics, ARPANET, The fall of the Soviet Union, etc
    • (2) History can be a poor predictor of the future because it doesn’t account for the fact that things change.
      • New structural financial events have occurred: the 401(k) is only 42 years old. The Roth IRA was created in the 1990s. Venture capital only began about 25 years ago. Technology stocks didn’t really exist in the public markets 50 years ago. 
  • The best lessons to take from history are broad, general ideas about human relationships and behavior; for instance, lessons about fear, greed, etc. The more specific trends, trades, etc from history will be less reliable because the world changes all the time. 
  • “Things that have never happened before happen all the time.” (87) [Stanford Professor Scott Sagan]
  • But those record-setting events had no precedent when they occurred. So the forecaster who assumes the worst (and best) events of the past will match the worst (and best) events of the future is not following history; they’re accidentally assuming that the history of unprecedented events doesn’t apply to the future.(91),
  • “…what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising” [Daniel Kahneman] (92)
  • The most important economic events of the future—things that will move the needle the most—are things that history gives us little to no guide about. They will be unprecedented events. Their unprecedented nature means we won’t be prepared for them, which is part of what makes them so impactful. This is true for both scary events like recessions and wars, and great events like innovation. (92)


Chapter 13: Room for Error

  • The world is random and volatile. You should plan on your financial plan not going according to plan, and build in some room for error or a margin of safety. 
  • It’s important to save for things you can’t possibly predict or even understand, the “unknown unknowns”. 
  • Having room for error (or a margin of safety) enables you to survive challenges or hardships that might completely financially destroy someone else without the benefit of a financial safety net.
  • Strategies to maintain a margin of safety: 
    • Keep an emergency fund of savings so you don’t have to incur credit card debt for short-term emergencies
    • Use conservative returns to estimate your future stock market gains. 
    • Avoid single points of failure. Diversify your income streams so you’re not dependent on a single source of income
    • You have to survive to succeed. Don’t engage in speculative risks that will completely wipe you out financially should they go wrong. That is financial Russian roulette. No risk that can wipe you out is ever worth taking. The downside is not worth the potential upside. It’s better to use a barbell strategy for investment (take risks only in a small portion of your portfolio; be conservative in the other section).
  • The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—“unknowns”—are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day. (98)
  • Room for error does more than just widen the target around what you think might happen. It also helps protect you from things you’d never imagine, which can be the most troublesome events we face. (103)


Chapter 14: You’ll Change

  • We’re not static; our personalities, desires, goals change over time. 
  • It’s hard for us to believe that our personalities may change over time. We tend to believe that our own personalities, goals, hopes, and dreams are static and fixed. That the things we want at age 20 will be the same at age 40 and the same at age 50, etc. 
  • It’s hard for us to predict what our own personalities and goals will be like in a few years or decades.Our future selves might be completely different!
  • We need to accept the reality that our personalities change, and that our minds change over time.
  • Our financial plan should be designed to accommodate that reality and provide us with options and flexibility that allows us to change our minds and not incur regret or damage.
  • “All of us,” he said, “are walking around with an illusion—an illusion that history, our personal history, has just come to an end, that we have just recently become the people that we were always meant to be and will be for the rest of our lives.” (108) [Harvard psychologist Daniel Gilbert]


Chapter 15: Nothing’s Free

  • There is no free lunch; all worthwhile endeavours come with a price.
  • The price of investing is volatility, fear, doubt, regret, and uncertainty. The higher the returns, the higher the price.
  • Trying to avoid volatility will cause you to invest in assets with lower payoff (e.g. cash or bonds) or engage in day trading. These strategies are usually not successful for the average investor.
  • A better strategy is to think of market volatility as a (entrance) fee (the price of admission to the public market), as opposed to a fine or penalty that should be avoided. 
  • Market returns are never free and never will be. They demand you pay a price, like any other product. You’re not forced to pay this fee, just like you’re not forced to go to Disneyland. (117)
  • The volatility/uncertainty fee—the price of returns—is the cost of admission to get returns greater than low-fee parks like cash and bonds. (117)
  • But if you view the admission fee as a fine, you’ll never enjoy the magic. Find the price, then pay it. (117)


Chapter 16: You & Me

  • Be aware of and identify what kind of investing game you’re playing: are you a short-term day trader or a long-term “buy-and-hold” investor? 
  • Different games lead to different behaviors, and different ideas about what consists of the “right” price for an asset.
  • Day traders don’t care about the health or fundamentals of a public company. They simply want to get in and out of a stock as quickly and profitably as possible.
  • Long-term investors who intend to hold onto a public stock for a long time might care more about the health, balance sheet, and fundamentals of the underlying company.
  • Not every investor is playing the same game, so taking your cues from others might lead you to take decisions that negatively affect your investment strategy
  • You need to understand your own time horizon, identify which game you’re playing, and adjust your strategy accordingly.
  • An idea exists in finance that seems innocent but has done incalculable damage. It’s the notion that assets have one rational price in a world where investors have different goals and time horizons. (118)
  • A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. (123)


Chapter 17: The Seduction of Pessimism

  • In the long-run, optimism is a good strategy because the world tends towards improvement for most people, most of the time.
  • However, pessimism is more common than optimism for several reasons:
    • It sounds smarter; optimism can be mistaken for naivete or ignorance of risk
    • Treating threats or danger as more urgent than opportunities gives us better odds of survival and reproduction, so pessimism becomes an evolutionary advantage.
    • Opportunities or progress takes time to compound, sometimes over decades, while destruction often happens quickly.  Progress occurs too slowly for people to notice, while destruction often happens quickly. So optimism goes unnoticed or takes time to observe, while pessimism can take root quickly.
  • We underestimate the effects of innovation and progress over time, and overemphasize bad news or disaster. 
  • We also fail to understand that threats can produce solutions and innovation of equal magnitude. We tend to believe that bad situations will stay bad forever without accounting for the fact that problems correct and people adapt.
  • Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. (124)
  • Maybe that’s why it’s so seductive. Expecting things to be bad is the best way to be pleasantly surprised when they’re not. (134)


Chapter 18: When You’ll Believe Anything

  • We’re more likely to believe something is true when we want to believe it is true. 
  • The world is complicated, and most of us have limited mental models through which we view the world. We create narratives to fill in the gaps that form the blind spots in our view of the world. 
  • This makes us very vulnerable to people who claim the world is predictable and controllable, and that they hold the key to making predictions and providing answers.
  • The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true. (137)
  • If there’s a 1% chance that someone’s prediction will come true, and it coming true will change your life, it’s not crazy to pay attention—just in case. (139)
  • Coming to terms with how much you don’t know means coming to terms with how much of what happens in the world is out of your control. And that can be hard to accept. (143)


Chapter 19: All Together Now

  • This chapter mostly summarizes the various lessons from prior chapters. Although everyone has different values and goals, there are a few universal truths in money:
    • Be humble. Respect the power of luck and risk when things are going right. Forgive yourself when they go wrong.
    • Have less of an ego. Wealth is created by suppressing your ego, and forgoing unnecessary consumption in order to save and have more options in the future.
    • Time is the most powerful force in investing. It causes little things to grow, while big mistakes fade away. Take advantage of compounding and increase your time horizon.
    • Plan on your plans not going according to plan. You can be wrong half the time and still grow wealthy. Become comfortable with many things going wrong.
    • Use money to buy and gain control over your time. Freedom and control over one’s time is an extremely powerful source of happiness.
    • You need to have an emergency fund/savings. You should have savings for things that aren’t designated for anything in particular. It enables you to hedge against the unplanned surprises that happen throughout everybody’s life.
    • Have room for error or a margin of safety.  
    • Risk is not an enemy; you should like risk because it pays off over time. But, you should be wary of ruinous risk that wipes you out completely because it takes you out of the game, and prevents you from taking future bets that will pay off over time. Don’t play financial Russian roulette.
    • Define the game you’re playing, and make sure you’re not being influenced by people playing a different game.
    • Life is messy; respect the mess.
    • People have different goals and desires. Personal finance is personal, there is no single right answer, and no one is crazy. 


Chapter 20: Confessions

  • Housel talks about his personal finance and investing decisions, his values and goals, and the reasons behind them.
  • There’s often a gap when what people suggest you do, and what they themselves actually do for themselves. Watch what people do, not what they say. 
  • Housel personally:
    • Declares that independence is his own personal financial goal
    • Lives well below his means; most of his family’s raises accrues to savings (and investments)
    • Lives comfortably, but frugally. He has a high savings rate.
      • He doesn’t need to keep up with the Jones and engage in constant status keeping. (avoids excessive hedonic adaptation)
    • Believes that dollar-cost-averaging into a low-cost index fund provides the highest odds of long-term success. He is a buy-and-hold investor.
    • He maximizes for being able to sleep well at night; this means not engaging in financially ruinous investments. 
  • Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals. Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want. (153)
  • It’s mostly a matter of keeping your expectations in check and living below your means. Independence, at any income level, is driven by your savings rate. And past a certain level of income your savings rate is driven by your ability to keep your lifestyle expectations from running away. (153)
  • I’m saving for a world where curveballs are more common than we expect. Not being forced to sell stocks to cover an expense also means we’re increasing the odds of letting the stocks we own compound for the longest period of time. Charlie Munger put it well: “The first rule of compounding is to never interrupt it unnecessarily.” (155)
  • Beating the market should be hard; the odds of success should be low. If they weren’t, everyone would do it, and if everyone did it there would be no opportunity. (156)
  • I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one. When I think of it that way, the choice to buy the index and hold on is a no-brainer for us. (157)
  • One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results. The reason is because the world is driven by tails—a few variables account for the majority of returns. (157)
  • My investing strategy doesn’t rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades. (157)


Postscript: A Brief History of Why the U.S. Consumer Thinks the Way They Do


  1. August, 1945. World War II ends. 
  • The aftermath of WWII created a housing shortage, a surge of returning soldiers, and the question of what to do with all these soldiers.
  1. Low interest rates and the intentional birth of the American consumer. 
  • After WWII, consumption became an explicit economic strategy
  • The Federal Reserve kept interest rates low to reduce the costs of financing the war.   
    • This also made the cost of borrowing – to buy homes, cars, gadgets, toys, etc – very cheap.
    • After years of thrift and saving to fund the war, actively promoting spending to encourage economic growth became a policy goal.
  • Depression-era regulations were loosened, and consumer credit exploded. The first credit card was introduced in 1950. (and for a time, interest on all debt, including credit card debt, was tax deductible)
  1. Pent-up demand for stuff fed by a credit boom and a hidden 1930s productivity boom led to an economic boom.
  • The Great Depression supercharged innovation, productivity, and resourcefulness. The end of WWII enabled people to take advantage of all these innovations in appliances, cars, phones, air conditioning, electricity, etc, and created a surge in consumer spending (enabled with new cheap consumer credit).
  1. Gains are shared more equally than ever before. 
  • The post-WWII economic boom in the 1950s created economic gains that were shared more equally throughout the population; the gap between the rich and the poor narrowed significantly, and the poor became less poor. Women and minorities also made significant economic improvements and gained more rights. 
  • The leveling out of classes means a leveling out of lifestyles, so that both the poor and the rich use mostly the same products, and live relatively equal or imaginably equal lives. 
  1. Debt rose tremendously. But so did incomes, so the impact wasn’t a big deal.
  • Consumer debt rose enormously throughout this (immediate post-war) period, but so did incomes, so the impact of the debt is negligible.
    • At its peak in the 195s, 1960s, and 1970s, household debt-to-income ratio was below 60% (It’s over 100% today)
    • Much of this debt is due to a surge in home ownership
  1. Things start cracking.
  • In 1973, things begin to change.
    • Recession
    • Highest rate of unemployment since the 1930s
    • High and persistent inflation
  1. The boom resumes, but it’s different than before. 
  • From 1945-1980, there was a general equality in lifestyle and consumption expectations among all Americans. Economic gains also distributed relatively evenly throughout all income levels of the population. 
  • But, after 1980, the gains from economic recovery begin to accrue mostly to the rich (the top 1%). [The Atlantic: Between 1993 and 2012, the top 1% saw their incomes grow 86.%, while the bottom 99% saw just 6.6% growth. (169)]
  • While the distribution of returns changed, people’s expectation of how their lifestyle should compare to their peers did not change.
  • Two American beliefs post-WWII:
    • (1) You should be able to enjoy a lifestyle similar to most other Americans
    • (2) Taking on debt to finance that lifestyle is normal and acceptable
  1. The big stretch.
  • The lifestyle and outcomes for the top 1% break away dramatically from the majority of Americans. 
  • This is highly visible and noticeable thanks to the advent of newspapers, television, and the internet.
  • People whose incomes are rising are taking on huge amounts of debt to emulate or aspire to the lifestyles of the legitimately wealthy Americans.
  • By 2007, household debt-to-income is more than 130%
    • A rising percentage of income is going towards servicing debt
    • Most of this debt is skewed towards lower-income groups.
    • The recent surge in debt already started from a very high pre existing debt base.
  1. Once a paradigm is in place it is very hard to turn it around.
  • It’s very hard to break a paradigm. Without a deliberate effort to break the cycle and actively return to the equality of the post-war era, the status quo is constantly being reinforced.
  • Since the 1980s, the economy works better for some people than others, and success is not as meritocratic as it used to be. In addition, it’s become more of a winner take all society, with higher gains going to smaller groups of people than in previous eras. 
  • The middle class is shrinking, and people’s expectations have not adjusted to this reality.
  1. The Tea Party, Occupy Wall Street, Brexit, and Donald Trump each represents a group shouting, “Stop the ride, I want off.
  • Thanks to the internet, cable news, and other mass media, people are more aware of how others live than ever before.
  • They’ve become aware that the status quo isn’t working for them in the context of post-WWII expectations of generalized equality.
  • They’ve become dissatisfied with the status quo; demand something radically new. 
    • E.g Brexit, Tea Party, Occupy Wall Street, Donald Trump, etc


  • The defining characteristic of economics in the 1950s is that the country got rich by making the poor less poor. (163)
  • This was important. People measure their well-being against their peers. And for most of the 1945–1980 period, people had a lot of what looked like peers to compare themselves to. Many people—most people—lived lives that were either equal or at least fathomable to those around them. (165)
  • …people’s expectations were still rooted in a post-war culture of equality. Not necessarily equality of income, although there was that. But equality in lifestyle and consumption expectations; the idea that someone earning a 50th percentile income shouldn’t live a life dramatically different than someone in the 80th or 90th percentile. (168)
  • The lifestyles of a small portion of legitimately rich Americans inflated the aspirations of the majority of Americans, whose incomes weren’t rising. (170)
  • Tax cuts over the last 20 years have predominantly gone to those with higher incomes. People with higher incomes send their kids to the best colleges. Those kids can go on to earn higher incomes and invest in corporate debt that will be backstopped by the Fed, own stocks that will be supported by various government policies, and so on. (172)
  • …it’s a key part of what drives people to think, “I don’t live in the world I expected. That pisses me off. So screw this. And screw you! I’m going to fight for something totally different, because this—whatever it is—isn’t working.” (173)


Recommended Reading

You may also enjoy the following books:

Antifragile: Things That Gain from Disorder, by Nassim Nicholas Taleb (2014) [ My Book Notes]


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