Book Review: The Psychology of Money

I am often asked by clients for a book suggestion around investing.  I have one.  It is not about the plumbing of the financial system or a history of financial events.  Rather, The Psychology of Money: Timeless Lessons on Wealth Greed and Happiness by Morgan Housel underlines the critical ingredients in achieving financial success.  It is a fun book, spoken in causal language delivered with relatable stories.

Unlike other financial planning books, it is not prescriptive.  i.e. save 10% of your income, be diversified and don’t sell during downturns and voilà; you’re ready for retirement.  The premise of the book is “that doing well with money has little to do with how smart you are and a lot to do with how you behave.”  And, he secondly defines a goal, which is happiness, not being rich.  He states that “creating a life where you feel in control is the common denominator of happiness”.  And, uncomfortably as it may sound “using money to buy time and options has a lifestyle benefit few luxury goods can compete with.”

Wealth is what you don’t see.  It is accumulated income that was not spent.

I particularly enjoyed the chapter – The Seduction of Pessimism: Optimism sounds like a sales pitch.  Pessimism sounds like someone is trying to help you.  Alternatively stated: pessimism is intellectually enlightened while optimism is oblivious to risk.  Why is this?  Many, including the author, see progress, the good news, as happening too slowly, too incrementally to notice while the pullbacks are sudden, harsh, and memorable.  Yes – things can go sideways but, in the end, he suggests that we should make decisions based on the overwhelming probability of human advancement.

He reminds us that “finance is overwhelmingly taught as a math-based field, where you put data into a formula and the formula tells you what to do, and it’s assumed that you’ll just go do it.” There is no homogeneous strategy that works for everyone.  We are all different and people want an approach that allows them to sleep at night.

Mr. Housel believes that none of us are crazy and that we all making rational decision based on the information at hand.  It is still rational even if those decisions lead us to financial ruin.  Reading this book will help uplift the framework from which you make those decisions.

If you’re interested in reading this book let me know.  I have 10 to give out.  And, once you’ve read it, I would love to sit down and have a coffee and discuss it.