1-Sentence-Summary: The Psychology of Money explores how money moves around in an economy and how personal biases and the emotional factor play an important role in our financial decisions, as well as how to think more rationally and make better decisions when it comes to money.
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Table of Contents
Our finances play a huge role in our lives. Yet, people rarely discuss them or educate themselves on this topic. For this reason, many presumptions and false ideas about money have emerged over the years. People think having money is a result of luck, or that rich people are all inheritors, or, worse, that wealth belongs only to those who disrupt — or even exploit — the world.
All of this is wrong. Money is a universal asset circulating in the world. And you too can become financially independent, if you change your current mindset and choose to adopt a few wealth-growing practices. At first, you’ll have to acknowledge your financial situation. Biased financial decisions are what stand in the way between your current life and the life you desire.
Seeking status, envy, and other emotions controlling you all play a significant role when it comes to your financial decisions. The Psychology of Money by Morgan Housel will teach you what you can do, starting today, to improve your finances.
Here are my three favorite lessons from the book:
- Being greedy can turn out to be the biggest financial mistake you’ll ever make.
- Envy has no place in the money market, as it can blur your thinking.
- Our early experiences with money determine our financial decisions later on.
Now, let’s discuss these lessons in detail, and see how we can benefit from them!
The Psychology of Money Summary
Lesson 1: When it comes to managing your money, it’s better to leave greed out of it.
Are you a greedy person? Of course not! Or at least, that’s what you tell yourself. We all like to think highly of ourselves and blame our misfortune on bad odds. This is the case of Jesse Livermore, a stock market trader born in 1877.
Prior to the notorious market crash that occurred in 1929, he took a short position, betting on the decline of the market. He made over $100 million, the equivalent of $1.6 billion today!
Instead of enjoying his riches for life, however, the winning trade made Livermore feel invincible. Naturally, it wasn’t long until he lost everything he had earned by placing all the wrong trades. The sudden downfall pushed him to the edge, and he eventually, sadly, ended his life one night.
The problem was that his success made him want even a bigger slice of the cake, although he already had more than anyone could wish for. The lesson here is: Don’t be greedy, and learn to be humble.
When you already have what you wished for or accomplished significant goals in your life, learn to be grateful, maintain your status, and enjoy the present, instead of always seeking more and more. When you’re scared of losing everything you have, you won’t be happy to risk it all for potential gains.
Lesson 2: Strong emotions such as envy can push you towards making sloppy decisions.
Most people know that investing takes time. They even want to stick to their investments through good and bad, but then the fear of missing out or envy get in the way — sometimes both at the same time!
Managing your emotions is one of the most important things you can work on if you want to become financially independent. Always remember that your journey will be different from any other person you know, so there’s no need to compare yourself to them or be jealous of anyone’s greater assets.
Just take the example of Rajat Gupta, the former CEO of McKinsey. Although he came from a modest background and made it to $100 million in net worth, he still was envious of Warren Buffett for being a billionaire. As such, he committed insider trading, which is one of the most common yet dangerous financial crimes for investors, and got charged with a substantial prison sentence for it.
In other words, he let envy get the best out of him and paid for it a thousandfold. Was it worth it? Definitely not. However, his misfortune serves as a valuable lesson for anyone looking to make better financial decisions. Be rational, and think twice when it comes to money. Always filter out your emotions.
Lesson 3: The experiences we have early on in our life determine our financial decisions.
We all grow up differently. Was your childhood similar to someone born in 1800? 1900? Of course not!
Some people grow up in times of financial crisis. Others know nothing but bull markets until they are in their 30s! As such, those two types would have very different opinions about what a good investment strategy consists of, whether a portfolio should be stock-based or bond-based, or how much risk is worth taking.
We may think that we have no hidden biases, but a study conducted by Ulrike Malmendier and Stefan Nagel proves that people invest according to how the economy looked like when they were young adults. As such, someone who’s experienced high inflation may not see bonds as a good investment, while someone who’s been through turbulent times may think the opposite.
It is of utmost importance that we acknowledge our hidden biases, so as to be able to diminish them and make better choices. In general, any financial decision should always be backed up by sound analysis, reliable facts, and a mind open to new perspectives and constructive criticism.
Moreover, you should work on your ability to adapt to trends and destroy your phobia of new ones, even if it contradicts your inner beliefs. The money market leaves no room for subjectivity, biases, or impulsive decisions. Rushed investments can wipe off years of savings, while valuable ones can speed up your journey to financial freedom.
The Psychology of Money Review
If you feel like you’ve made all the wrong financial decisions, or that wealth is just not one of the things you’ll ever be able to achieve, The Psychology of Money is the book for you. Reading it will open your mind towards new perspectives and have you conduct an introspection to realize how biased you were all along. This book will give you little steps to take to see instant changes in your financial life.
Who would I recommend The Psychology of Money summary to?
The 28-year-old person who feels like they’re behind with their finances and want to get out of that situation, the 40-year-old life coach who wants to deepen their knowledge to better help their clients or the 22-year-old economics student who wants to expand on their study materials.
Last Updated on December 5, 2022