Morgan Housel’s 2020 book, The Psychology of Money, looks beyond the spreadsheets and finance textbooks and into how emotions and intuition influence the way people interact with money. Unlike highly theoretical fields like physics or medicine, human psychology plays an inherent role in the world of investing, and this book explores how biases have tangible effects on both the global markets and one’s personal finances.
Through a mix of anecdotes, research, examples, and advice, Housel presents 19 chapters that each explore a different aspect of how people think about money. These chapters blend to present one fundamental idea to investors: “Financial success is not science-based, but a soft skill. How you behave is more important than what you know.”
The book focuses on demonstrating how wealth is not created through the study of theoretical concepts such as interest rates, but instead, by understanding what drives people to do what in different financial market conditions.
The Psychology of Money starts by introducing the stories of Ronald James Read and Richard Fuscone. Read spent 25 years working at a gas station and 17 years as a janitor. With his modest earnings, he saved and invested in the stocks of blue-chip companies. Upon his death, he left behind $8 million for his kids as well as the local hospital and library. In contrast, Fuscone was a top executive at Merrill Lynch who retired early to invest on his own and pursue charitable causes. He ended up going bankrupt in 2000 and losing almost everything. This story, and many others throughout the book, have a common theme: Time is the greatest force in investing and compounding is deceptively powerful.
While every chapter has its own stories and lessons, the concept of time as being the most powerful investing tool is emphasized throughout. After all, time allows small investment wins to grow exponentially, and big losses to fade over time. Read understood his time horizon and invested accordingly, eventually amassing significant wealth. Fuscone, on the other hand, made money through his successful career, but failed to keep it. He lacked the humility and fear that is required to understand that the money you make can be lost far more quickly than most can make it back. The Psychology of Money is a great read that will help anyone deepen their understanding of how humans interact with money and, more importantly, inspire self-reflection into their own investing habits and views on the financial markets.
