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Thoughts: The Psychology of Money (Book)

November 15, 2021

Abstract

Morgan Housel’s “The Psychology of Money” is less of a technical book and more of a collection of wisdom and wishful advices. It is N. Taleb’s “Bed of Procrustes” augmented with real life anecdotes, morsels of history, and a lot of quotations. Although Housel professes a very conservative and frugal approach to managing money, his advice cannot be disputed without a very good counter argument. The cautious models, frameworks, and signposts laid out in the book would prevent an investor from being foolish and that Housel says is too easy to be in the modern financial system.

“A genius is the man who can do the average thing when everyone else around him is losing his mind.”

— Napoleon

The psychology of money

This book is unique with respect to contemporary finance books because it assumes a psychological approach to finance, rather than a quantitative analytical one. The reason being this: Humans are inherently emotional and irrational creatures. Most of our decisions are instinctive and impulsive. Then how can we assume an individual to behave like a well-tuned machine making decisions based on “rational” and precise mathematical formulae? For example: If you were an investor in 2008, it would have been very difficult to hold on to your assets when everybody was selling, or moreover, to dare to buy in the market crash because as Warren Buffett quipped, “Everything got cheaper”. Unless you have the discipline and patience of Warren Buffett, such decisions are hard to even comprehend. And that is essentially what this book is about. It talks about few fundamental basic, even mundane nature of human and how we tend to act upon them, how it all applies to finance and how we can leverage this knowledge to become more disciplined and patient.

“To grasp why people bury themselves in debt you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism…”

— Introduction, The Psychology of Money

The idea that gives rise to such reasoning is quite potent and an ironically overlooked one in the money business.

My favourite Housel quote would be the following:

“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.”

— Morgan Housel

Most people don’t realise it but this is a very powerful idea. It can explain why we don’t usually get the result we think we ought to get. It can point to how we ought to react and improvise under dire as well as lucrative circumstances. Not just in finance but in other aspects of life too. Cultures and systems have grown to be complex and varied. Wisdom has become more diverse and specialized which is exactly what wisdom is not.

I strongly hold the belief that all complex systems and the world in general, is simple. To clarify, this “simple” does not mean “simple to understand”, it means “simple to navigate and emerge successful however one chooses to define the word for themselves”. Because ultimately, all effort of man and woman is to find utility in life.

Things that worked for me:

  1. It’s not a long book which is a boon for me really. It makes its points concise and clear and that’s good.

  2. In the edition which I have, there is a postscript section which chronicles the economic history of the US from 1945 to the present day and that is very cool. In fact, I was looking for something exactly the same but for India. I want to understand how we got were we are.

  3. Entire book summary tacked at the end. It’s a conglomeration of the most important ideas all in one place, kind of like what I do here with my notes. Now, I can refer to that chapter.

Postscript

I’m aware that its been quite a long time since I wrote one of this. I miss those days when I could be more myself. I have been quite busy lately with college admission processes as you have no doubt noticed with a decline in my rate of publication and engagement on the blog. I would like to clarify that this is NOT a book review. This is a preservation of my thoughts that were kindled by this book so I can refer back to them later.

Basil | @itbwtsh

Tech, Science, Design, Economics, Finance, and Books.
Basil blogs about complex topics in simple words.
This blog is his passion project.