The 18 lessons of The Psychology Of Money – by Morgan Housel

“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.”

The Psychology of Money, by Morgan Housel, is a masterpiece in the psychology of personal finance. In this book, you will be faced with scenarios that may challenge your perspective on not just your own but also other people’s personal financial situations.

Morgan lays out 18 simple lessons which can have a lasting effect on your own psychology towards finances.

1. No One’s Crazy

This chapter talks about how one person’s decision with their money may seem crazy to you, but to them, it makes complete sense, “Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.”

Everyone comes from different backgrounds with different experiences. Over the years and especially the younger years of an adult’s life, their psychology around money evolves and is moulded to suit the environment. For some people, they grow up in an area or household with little spare money at the end of the month, compare this to a person who grows up in a wealthy neighbourhood with plenty of opportunities and with a family with surplus cash at the end of the month, each of these people will have the psychology of money on the two broad ends of the spectrum. 

Taking this example, for the person who grew up with little surplus cash at the end of the month, being frugal and saving every penny would be attributed to the environment they grew up in. Comparing this to the person with ample opportunities and much surplus cash, they would generally be more inclined to invest their money, not just in the traditional sense of the stock market but also in experiences, knowledge and fun.


“Their view of money was formed in different worlds. And when that’s the case, a view about money that one group of people think is outrageous can make perfect sense to another.”

2. Luck & Risk

“Go out your way to find humility when things are going right and forgiveness/compassion when they go wrong. Because it’s never as good or as bad as it looks.”

Morgan describes how the world is extremely complex. The result of one’s actions does not come from the individual effort but is guided by forces. The world itself is too complex to allow 100% of your actions to dictate 100% of your outcomes.

When we view those in high places, those who have more money than us or just generally a better lifestyle, most attribute their situation to luck. “Oh they are lucky to have got a new position”, “They were just lucky their investment paid off” when in fact in many of the risks of the case played a factor, they took a risk for the new job, and it paid off. They invested in a new start-up and it paid off. 

On the flip side, there are cases of ‘luck’, taking a look at Bill Gates. “ One in a million high-school-age students attended the high school that had a combination of cash and foresight to buy a computer. Bill Gates happened to be one of them.”, “If there had been no Lakeside, there would have been no Microsoft” – Bill Gates told the graduating class of 2005. 

In this sense, it was luck that Bill Gates attended only one of a handful of schools which adopted the computer early. But through this ‘luck’ he put in the risk, the reward….Microsoft, the now is a $2 trillion market cap company in 2021.

Luck vs Risk

3. Never Enough

“The hardest financial skill is getting the goal post to stop moving. But it’s one of the most important. If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in the extra effort. It gets dangerous when the taste of having more – more money, more power, more prestige – increases ambition faster than satisfaction.”

This is an extremely important lesson to remember and think about, especially for those who are pursuing the FIRE journey. There is no reason to carry on the investment journey to FIRE if you have already reached your goal. The whole reason for someone to aim for early retirement is to gain back control of their time and live life on their own accord. There is no reason to risk what you have for what you don’t have and don’t need.

We can apply this to saving also, more specifically an emergency fund. As we talked about at the beginning of the book, having an emergency fund is essential to the majority of people. Having one can save you from financial troubles but there is a point where you have enough money. Carrying on saving into an emergency fund well beyond what you need can affect your end goals. Instead of ever-increasing your emergency pot because it’s ‘not enough when it certainly well is, this capital could be invested instead and be working for you. 

Knowing when enough is enough and you have hit your goal is essential. 

Enough is not too little, enough is realizing the opposite, that enough is just that, enough.


4. Confounding Compounding

“Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated”

A popular statistic from one of the most famous investors, Warren Buffet, is that $81.5 billion of his net worth out of $84.5 billion came after his 65th birthday. Really these types of cases are very far and few between. Most of us normal people aren’t amazing or famous stock pickers so by looking for these one-off wonders of high returns we can look to create pretty good returns which we can stick with and then repeat for the longest period of time.

One of the most powerful things we can do with our investments, over the increase of invested capital is to increase our time horizon. Time is one of the most powerful forces in investing.

“More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.”

A small start can lead to extraordinary results over the long term which seem to defy logic. Not just in finance and investing, but this can be applied to other parts of life. We will talk more about compounding in a bit.


5. Getting Wealthy Vs. Staying Wealthy

“There are a million ways to get wealth..but there’s only one way to stay wealthy: some combination of frugality and paranoia.”

Becoming wealthy, staying wealthy and having money success isn’t just about creating money but also keeping that money. To summarize it simply and in a single word it would be ‘survival’. Getting money, and creating cash flow takes risks, being optimistic and putting yourself out there. Whether that be putting yourself out there for a new job or being optimistic about a new business venture. But keeping your money requires the opposite of risk, it requires you to become frugal, to have a fear of losing what you have made through risk and your time.

Managing your risks, and creating a plan is key. The most important part of a plan is to plan for the plan to not go to plan. That’s why many people/investors have emergency funds, for those unexpected money problems. Investors keep a small cash position if the market dips to take advantage. We all help things go to plan, sunshine and daisies, but the real world is not like this. So plan for the unexpected and position yourself to take advantage of it.

6. Tails, You Win

“Anything that is huge, profitable, famous, or influential is the result of a tail event – an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. when most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.”

Tails events are also known as the Zero-one law. It’s a probability theory that specifies an event – tails event. These tails events are rare but they do happen with a chance of zero or 1 (100%) chance. Events such as the financial crisis of 2007/2008, Coronavirus, the products you use today and the services you use are all tails events.

On a side note there is an investing risk called a tails risk, sometimes called “fat tails risk). This is the financial risk of an asset or portfolio of assets moving more than a standard deviation from the current share price, more than the normal price movements. The tails risk includes low-probability events occurring at both ends of the curve (Gain & Loss), otherly known as tails risk. Normally us investors are more worried about unexpected losses rather than gains.

7. Freedom

“The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today. People want to become wealthier to make them happier. Happiness is a complicated subject because everyone is different. But if there’s a common denominator in happiness – a universal fuel of joy –  it’s that people want to control their lives.”

Freedom is wealth. Wealth has 3 parts, financial, health and time. Once you control all three you are wealthy and thus free. You are free to choose whether to work or not, free to choose how far you want to run and free to choose where you spend your time, helping others or doing hobbies which make you happy.

Angus Campbell – a psychologist at the University of Michigan – summed up the common denominator of happiness perfectly: “Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.” 

8. Man in the Car Paradox

“No one is impressed with your possessions as much as you are.”

This one is really interesting to understand, once you understand it yourself and remember it, your conscious decision to buy things should become more meaningful.

The man in the car paradox relates to how we perceive someone with their assets. In the example, we have a person driving a nice, expensive car. This could be your dream car, a Ferrari, Lamborghini, or maybe an Austin Healey. The irony is that we never really look at the driver, rarely do we think “Wow, the driver is cool, they must be special”, rather we think “Wow if i had this car I would look so cool.” The paradox is people want to signal to others via their wealth to be admired and liked. But in reality, most people bypass admiring you to admiring your outward wealth.

Thus no one is more impressed with your possessions as much as you are. Once you learn this and take this into consideration for future purchases. You will become more conscious of the happiness it may bring you and what you want to reflect on yourself with your physical items, such as clothes, jewellery and cars.

9. Wealth is What You Don’t See

“Wealth is hidden. It’s income not spent. Wealth is an option net yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now”

Someone driving a £100,000 car may be wealthy. But the only data point you have to calculate their wealth is that £100,000 car. In fact, that car may even be a symbol of debt, taken out on finance. With that, that’s all that you see of their ‘wealth’. The same can be said for someone who’s driving round in a Vauxhall worth £500, the only data point you have is their worth is £500 and the thinking of they are poor or have little wealth.

We tend to judge people’s wealth with the information in front of us, we cannot see people’s bank accounts or brokerage accounts and so we rely upon their outward appearance to gauge how financially successful someone is. These thoughts and feelings are reinforced by modern-day capitalism, where we are taught from a young age that having items/possessions = wealth.

Knowing the difference between wealthy and rich is the key, “not knowing the difference is a source of countless poor money decisions.”

Being rich is having an income and large ‘value’ possessions. The rich can drive a £100,000 car because they are able to purchase it with debt, to have access to that level of debt you need a certain level of income to afford the monthly payments.

Being Wealthy is different. Being/becoming wealthy is income which isn’t spent. Having wealth is having the option not taken to buy something later – freedom. The value of wealth comes from options, flexibility and growth.

10 . Save Money

“Personal savings and frugality – Finance’s conservation and efficiency – are part of the money equation that is more in your control and have a 100% chance of being as effective in the future as they are today.”

Independence on any level, including having freedom, is driven by your savings rate. A savings rate is the % of income left remaining and is saved after paying for your monthly expenses. Typically the higher the savings rate the faster one travels towards independence and freedom. Having a high savings rate alongside a high income is a killer combination for an individual or couple to have.

“Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.”

“Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see.”

Saving Money

11. Reasonable > Rational

“Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.”

Rationally when it comes to money, more specifically savings rates, we tend to look at the pure numbers. Calculate the wants and the needs and reduce or get rid of the wants to get the best savings rates possible. Rationally at the time, this is achievable but reasonably thinking it’s impossible as our lives have social components and random events built into our lives. We can say that we will cut out takeaways/eating but realistically how long will it last? Is it plausible and reasonable to create such a plan for you to follow long term?

Same with investing as a whole. A rational investor makes decisions based on numerical facts but you’ll find that investing also has a social component which is often ignored. While it is true companies have fundamentals which relate to a ticker symbol on the stock market, the overall stock market is powered by feelings, fear and greed.

12. Surprise

“A trap many investors fall into is what I call ‘historian as prophets’ fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.”

One of the driving factors for anything tied to money is the stories people tell themselves and the preference for goods and services. Over the years and decades, these factors will change with each culture and generation. 

Remember past performance does not indicate future performance. 

13. Room for Error

“Margin of safety – you can also call it room for error or redundancy –  is the only effective way to safely navigate a world that is governed by odds, not certainties.”

You can create a margin of safety in most situations, could be financially or could be another part of your life.

You never know when an accident may happen like your car breaks down or your washing machine breaks. But what you can do is create an emergency fund to mitigate the financial pressure such a problem may cause. 

Other examples are to create another income stream or stream. Your job isn’t guaranteed and in an economic downturn, how safe is your job? To mitigate this you could create an additional income source to reduce the reliance upon your job.

When applying for jobs, you don’t just apply for one and hope for the best. Creating a margin of safety and increasing your chances of an interview and potential job, you apply to many openings.

Nothing in life is certain but covering these uncertainties and increasing your margin of safety will help with an easy night’s sleep.

You will find yourself running into errors throughout your financial journey, it is human nature. When it comes to investing you will find this also. With investing there are hidden traps around your psychology. Check out this article which goes over 5 psychological traps of investing.

Psychological Traps of Investing

14. You’ll Change

“We should avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret.”

As the years progress in your life, your mentality changes, your psychology changes and views upon the world develop with you as we all progress. 

Over that period of time, your circumstances change and as you complete goals, new goals arise.

Being open to change is key, not just with day-to-day life but also with your finances and financial goals. You may create an original goal of £1,000,000 investment account, as the years progress you may come to realise that such size of an account is not needed. Your goal changes to retire early rather than a portfolio size. Being open to such changes doesn’t mean you haven’t achieved your goal, it means you have evolved. 

Taking this example, if you ignore your desire to retire early, you may get to the stage of a £1,000,000 portfolio but be left with the regret that you could have retired earlier if it wasn’t for your stubbornness of sticking to that single goal.

Changing decisions

15. Nothing’s Free

“Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it. The problem is that the price of a lot of things is not obvious until you’ve experienced them first hand when the bill is overdue.”

Everything has a price, not always necessarily monetary, but they certainly have a price or a payoff. The key to lots of things with money is figuring out the price you are willing to pay for it. What you value and are willing to pay for it may not be the same as someone else. In theory, most things are harder in practice than they are in theory. We may be overconfident and so we overvalue it or not realise the value and undervalue it.

When it comes to investing successfully, it demands a price. This isn’t necessarily currency-wise, as in pounds & pence, but it’s in volatility, fear, doubts, uncertainty and regret.

“It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investment gains to work in your favour.”

“Define the cost of success and be ready to pay for it. Because nothing worthwhile is free.”

16. You & Me

“Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviours of people playing different games than you are. The main thing I can recommend is going out of your way to identifying what game you’re playing.”

Few things matter more with money than understanding your own time horizon, your own goals and to not be affected by those who have different behaviours and goals. We all play different games, we are all on different levels on the field. Some of us are high-income, and others are low. Some have high savings rates, others have low. Those are the two ends of the extreme, we also have everyone in between. Each of those people has different goals, dreams and desires, with many of them not reflecting the same as you.

“It’s hard to grasp that other investors have different goals than we do because the anchor of psychology is not realising that rational people can see the world through a different lens than your own.”

What we must learn is that there is no single right answer, only the answer that works for you. Yes from the investing point of view investing in an index such as the S&P500 or an all-world index, over the long term, gives the best returns. But this does not take into account your timeline, whether that be short or long, and neither does it take into account your overall goal. The same goes with the long-term argument of whether it’s best to invest or overpay on a mortgage, the answer to this is personal and comes down to your mortgage, the stock market and your own psychology.

“Smart, informed, and reasonable people can disagree in finance because people have vastly different goals and desires.”

17. The Seduction of Pessimism

“Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.”

Pessimism sells, there is no doubt about that. When something bad happens it tends to affect everyone and captures everyone’s attention. Take the news, for example, very little of the time the hot topics are feel-good or something genuinely good going on in the world. The majority of the time they are pessimistic or bad news and we lap it up. This is because it’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent.

“When directly compared or weighed against each other, losses loom larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”

Applying this to the stock market, we can see why on a red day or a spiral towards a correction/bear territory that’s the only thing talked about. People panic and try to take profits, take their money out completely and/or protect themselves and their investments. It’s all-natural feelings, something we cannot ignore.

“Progress happens too slowly to notice, but setbacks happen too quickly to ignore.”

18. When You’ll Believe Anything

“The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.”

We rather develop stories and theories than accept that we don’t know something, doing so creates an illusion of understanding that psychologically comforts us. This projects the illusion of control versus the reality of uncertainty. 

There is so much that we don’t know and is outside our control that we can stick our heads into the sand and sing ourselves a lullaby of perceived control. We prefer to believe that we live in a predictable and controllable world, so much so that we sometimes believe other people’s stories which they also tell themselves.

“Wanting to believe that we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control.”

When planning we focus on what we want to do and can do rather than the plans, actions and decisions of others who might impact our personal outcomes.

If this article has intrigued you and you are now curious about this book here you can find the link to Amazon. Here you can buy the Kindle edition, Audiobook, hardcover or paperback.

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness – Morgan Housel


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