In the book, Psychology of Money Author Morgan Hansel tries to explain why we all should know about the stock market. The stock market is thought to be a toxic topic that many people don’t want to discuss. People believe it to be a money black hole where everything is sucked in.
The Psychology of Money a book by Morgan Hansel walks through the ways of having a better relationship with personal finance. It explains how Finance is not a subject like physics which is guided by laws but rather finance is guided by people’s behavior.
In this book summary, I dig inside the book and find some very interesting topics to discuss.
The stock market has been a difficult topic for me. I have people around me always suggesting not to get my hands dirty in the Stock market. Often telling me the market is very cruel and I might lose all the money.
They are not completely wrong, one of my friend’s father lost all his savings in the big crash of 2008. And none of my family members invest in the stock market. But you know kids are always intrigued at trying out things that they are asked not to try.
The same was with me. I had read articles about famous investors and common man making money through the stock market. I was fascinated by how some can be successful while much loose money.
Having this curiosity is the first step towards learning about personal finance. In this entire book, Morgan tries to demystify these myths and teach the readers how behavior change can help you to save and make more money.
Doing well with money has little to do with how smart you are but more to do how you behave and behavior is hard to teach.
“How you behave is more important than what you know”
Table of Contents
Chapters of the book The Psychology of money
3 Chapter 1 – No One’s Crazy
4 Chapter 2 – Luck and Risk
5 Chapter 3 – Never Enough
6 Chapter 4 – Confounding Compounding
7 Chapter 5 – Getting Wealthy vs. Staying Wealthy
8 Chapter 6 – Tails, You Win
9 Chapter 7 – Freedom
10 Chapter 8 – Man in the Car Paradox
11 Chapter 9 – Wealth Is What You Don’t See
12 Chapter 10 – Save Money
13 Chapter 11 – Reasonable>Rational
14 Chapter 12 – Surprise!
15 Chapter 13 – Room for Error
16 Chapter 14 – You’ll Change
17 Chapter 15 – Nothing’s Free
18 Chapter 16 – You and Me
19 Chapter 17 – The Seduction of Pessimism
20 Chapter 18 – When You’ll Believe Anything
21 Final Summary
The psychology of Money book summary
Ordinary people can also do good with money only if they have a handful of behavioral skills. Money is a matter that is kind of taboo in today’s society. People don’t like discussing it in public. Everyone is varying of discussing it with their kids, families, and friend.
Do you think this is the same reason why we don’t have a formal personal finance education? One of the most important things for humans to survive is understanding how money works. How to make more money from money. As famously said in the book Rich Dad Poor Dad “Make money work for you”.
The book The Richest Man in Babylon the one we reviewed earlier, had the basics of financial education. We understand the importance of it but then the next question arrives. Now what?
The psychology of money takes us through various small stories explaining the pros and cons of Stock investing. Though the main idea of stock investing the general idea is financial education.
The book starts with an interesting story of Ronald James Reed. Ronald’s Wikipedia page reads “Ronald James Reed was an American Philanthropist, Investor, Janitor, and Gas Station Attendant.”
According to Wikipedia after Read passed away in 2014 he received media coverage in numerous newspapers and magazines after his will showing a donation of US$1.2 million to Brooks Memorial Library and $4.8 million to Brattleboro Memorial Hospital.
Read amassed a fortune of almost $8 million by investing in dividend-producing stocks, avoiding the stocks of companies he did not understand such as technology companies, living frugally, and being a buy and hold investor in a diversified portfolio of stocks with a heavy concentration in blue-chip companies.
You might be amazed after reading Reed’s story, So was I. I never thought a janitor might be able to amass such a big amount of money in his lifetime. And if you read carefully these were never his savings but rather this investment.
In this story of making money, we understand Soft skills are more important than the technical side of money. You need not be technically savvy to understand it. Physics is guided by laws, finance is guided by people’s behavior.
Luck and Risk
Luck is the one thing that has astonished me, but when I searched on the internet, I am not the only one. I have seen people get things that they don’t deserve and some people getting smacked.
What factor is essential for luck to be in your favor. Is hard work the one? Or is it being smarter than the rest? When asked Robert Shiller Nobel-winning economist “What do you want to know about investing that we can’t know?” He replied, “The exact role of luck in successful outcomes.”
Luck is a very fascinating thing, how can the goddess of luck shine upon me. Is hard work the answer? Similar thoughts and ideas about luck were mentioned in the book The Richest Man in Babylon.
The author mentions that luck and risk are two sides of the same coin. One is favored and the other is not. And there is no way to know which side you will fall into.
The author explains this with the story of Young Bill gates. This is the same story from the book Outliers. The story of how Luck played an important role in the success of Bill Gates and the existence of Microsoft.
How big a role has luck played in one of the biggest stock market investors Warren Buffet? Today Warren carries the stick of luck whatever he invests in people follow him. The shares he invests intend to go 2X within days.
People often try to stretch their luck and you never know when the cousin of luck, Risk will start following you.
Getting wealthy vs staying wealthy
Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risks. 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.
Success and money come down to one thing survival. Getting wealthy has a path to follow, like working hard, being smarter than the rest, working more than the competition. But staying wealthy requires a lot more.
Sequoia, one of the most successful investment firms for over 4 decades. When the firm was asked, what kept the firm successful while the rest were merely seeing success on few sunny days. They said “we don’t rely on our laurels of yesterday, to make us successful tomorrow. We are paranoid about our future.”
Warren Buffet is one of the greatest investors of all time. In his lifetime as an investor, he has seen a total of 14 recessions. But Warren survived all of it, rather than survived he thrived. When the market was down he had a huge amount of cash ready to be invested at that time.
People attribute financial success to financial planning. But in face of adversity no plan works, It is said when you say, I have a plan, god laughs from above. 99% of the plan fails when things don’t go as planned. Who would have planned for a Pandemic? A plan is only useful if it survives reality.
We cannot control the odds, but we can be conservative about the future. Only two things might help us, Frugality and paranoia. Paranoia about the near future will help us be optimistic about the long-term future.
Man in the car Paradox
People use the wealth of others as a benchmark of their own desire to be liked and admired as a rich person. People often tend to fancy things that others have, like a nice watch, shoes, phones, cars, etc. But do we respect or admire the person owing that?
The answer is no. Let me explain. Remember the last time you saw an amazing car, maybe a sports car. You will remember the car but do you even recollect the face of the person driving it?
The answer is no, we always look at shiny things and imagine how great it would be if we had those things. People think that having those shinny things will make them admired in society and respected by others.
But that is not the case, these visible things are not something that describes the wealth of a person. But it is the wealth not visible that is the real value. If you spend too much money on things, you end up with more things than money.
The simple thing you need to know about money is that the more money you have the lesser money you spend on things that you think will satisfy you.
You don’t need to be wealthy to earn the respect and admiration of people. Respect and admiration are earned through humility, empathy, and kindness and not wealth.
The Psychology of Money is a great book. The book encompasses a lot of modern money problems and helps the next generation tackle them. The book simplifies the understanding of stock investing and makes us aware of the long-term gain.
The book helps us understand the power of long-term compounding and how it has helped people amaze a huge amount of money over a long period of time.