The Psychology of Money Review summary

The Psychology of Money Review and Summary

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Many of its lessons are so basic and obvious that they are often overlooked. Your granny probably wouldn't stop harping on the book's lessons because she knew they were good for you. It turns out that she was correct.
You'll find some helpful tips for budgeting and investing in this book.
But keep in mind that, as the book's title suggests, true happiness and fulfillment come from shifting your perspective and adopting a new way of thinking. The lessons I've picked up from this book are invaluable. It teaches you the nuts and bolts of personal finance, including the psychology of saving, investing, making projections, and spending. To become financially secure and wealthy (not rich, but wealthy) is everyone's ultimate goal, and I have no doubt that reading this book and putting its advice into practice (i.e., saving more and finding our best investment plan rather than just going with the trend or copying the investment style of others without knowing their intentions and not knowing them personally) will get us there. The book was enjoyable for me, so anyone who wants to check it out should do so. Your money and time will be well spent.






The following topics are covered in The Psychology of Money : How money circulates in an economy, How individual biases and the emotional aspect play a key role in our financial decisions, and how to think more rationally and make better decisions regarding money.

Personal finance, investment, and corporate success are all examined from a psychological and behavioral perspective in Morgan Housel’s “The Psychology of Money.” The study of mathematics, statistics, and computation is foundational to all of these disciplines. Housel, however, shows how everything in your life—your past, present, and future—contributes to the choices you make about money—including your worldview, ego, pride, marketing, and strange incentives.

The state of our own money affects us profoundly. However, these topics are rarely discussed, and few individuals take the time to learn more about them. That’s why there are so many misconceptions and incorrect beliefs connected to cash. They attribute wealth to chance or assume it is inherited by those who have it. Perhaps the only people who deserve to be wealthy are those who shake things up and reap the rewards of their innovations.

Wrong! Money circulates everywhere and serves as a medium of exchange. And you too may achieve financial freedom by just shifting your mentality and putting into practice some basic wealth-building strategies. At the outset, you must accept the reality of your financial circumstances. Inconsistent monetary choices are the main obstacle between you and the life you want to live.

Then, spotting and eliminating them will be less of a hassle. Your status-seeking behaviors, envy, and other emotions that you allow to govern you all have a role in the choices you make with your money. It goes without saying that there are additional avenues to investigate in order to find the best options for managing your finances. Morgan Housel’s The Psychology of Money details the steps you may take immediately to enhance your financial situation.

Highlights and Lessons

  • It is irrelevant how intelligent you are when it comes to making money and accumulating riches. Instead, your actions are what should be prioritized.
  • Financial ruin can strike even the most intelligent among us, while those with little formal education in finance but strong behavioral abilities can prosper.
  • Knowing how to do anything is insufficient. Making sound financial decisions requires you to overcome emotional and mental obstacles.
  • Because there is so little knowledge that has been amassed about modern finance, many of the mistakes that you make with your money are the result of your own inexperience.
  • You shouldn’t put at danger the things you need and already have to acquire those that you don’t.
  • It’s not the same thing to create riches as it is to keep it. Building wealth is simple, but protecting it is challenging.
  • While there are numerous strategies for gaining financial success, the one surefire method for protecting your fortune is to live frugally and fearfully at all times.

Here are the important takeaways from the book for me:

  • Putting greed ahead of responsibility can be a fatal mistake financially.
  • Competing in the stock market while feeling green with envy is a recipe for disaster.
  • In the long run, our fiscal habits are shaped by our earliest interactions with currency.

All right, let’s break down these teachings and figure out how we can use them.

First, it’s not a good idea to let greed influence your financial decisions.

Can I assume that you are a greedy person? Not at all! You tell yourself that, at least. Most of us would rather put the blame for our plight on external factors than on ourselves. Jesse Livermore, a stock market trader born in 1877, is a prime example.

In the days leading up to the 1929 stock market crash, he went short. This suggests he is betting that the stock market will decline. The three billion he made as a result made this the best career move he ever made. This sum would normally have been sufficient to provide his financial security for life. Oh, wait, that’s not quite right.

Livermore’s confidence was boosted by this successful trade, but it didn’t take long before he squandered his fortune on bad investments. This unexpected setback drove him to the edge, and he ultimately took his own life one night. He had more than anyone could reasonably hope for, but the trouble was that his success only made him crave more. Avoiding greed and developing humility are the takeaways from this story.

When you have everything you’ve ever wanted or reached a major milestone in your life, you should learn to be afraid, keep your position, and appreciate the present rather than always looking ahead. If you worry about losing everything, you won’t be excited about the chance of making a profit.

Second: Negligent decision-making is facilitated by strong emotions like envy.

In order to be successful with money and investments, we need to take into account and master a number of variables. One of these is FOMO, or the fear of missing out. It’s important to stay the course regardless of market conditions after making an informed investing decision.

Therefore, one of the most significant things you can do to achieve financial independence is to work on the emotional element. Keep in mind that you are on a unique path, and there is no point in comparing yourself to others or feeling envious of their successes.

Take former McKinsey CEO Rajat Gupta as an illustration. He had risen from obscurity to a net worth of $100 million, yet he still envied Warren Buffett’s billions. Therefore, he engaged in insider trading, one of the most prevalent yet hazardous financial crimes for investors, and was consequently charged with and given a lengthy prison sentence for this offense.

In other words, he paid the price a thousand times over for letting envy overcome him. Could you tell me if it was money well spent? No, absolutely not. One can learn from his mistakes, though, and hopefully avoid his fate. Be sensible and cautious with your cash. Don’t let your emotions cloud your judgment.

Thirdly, our financial choices throughout life are shaped by our early experiences.

It’s true that no two people have the same experience of childhood. However commonplace an action appears to be to you, it may be completely foreign to the person with whom you’re comparing it. Think of it this way: Would you say that your upbringing resembles that of a person born in the year 1900? 1960? All of the 20th century? Not at all!

Young people nowadays are growing up in a period of economic turmoil. However, there are investors that enjoy bull market trade for as long as ten years. As a result, the two groups would disagree on a wide range of issues related to investing, such as whether assets are superior than bonds and stocks and how much risk is acceptable.

Despite our best efforts to remain objective and knowledgeable, a study by Ulrike Malmendier and Stefan Nagel demonstrates that investors make decisions based on their perceptions of the economy when they were in their early twenties. Bonds may not seem like a good idea to someone who has lived through periods of high inflation, while equities may seem risky to those who have experienced market volatility.

In order to make more informed decisions, it is crucial that we become aware of the unconscious biases and thought patterns that limit our potential. All financial choices should be supported by thorough research, solid evidence, and an attitude that welcomes alternative viewpoints and critical feedback.

Further, you should concentrate on your adaptability and overcome your fear of new trends, even if doing so runs against to your own values. There is no space for emotion, partiality, or hasty judgments in the money market. In contrast to wise investments that might hasten your path to financial independence, hasty ones can wipe out years of savings.

Knowledge gained through experience can be both beneficial and detrimental.

Everything you’ve been through and learned over the years shapes how you think about and handle money now. You, like everyone else, will have your own special perspective on the way things are. Your personal history, values, and experiences shape who you are and how you respond to the world.

Only about 0.00000000001% of history can be explained by your own financial experiences, but those experiences may account for as much as 80% of your worldview.

One person was born in the United States in the ’50s, while the other was born in the ’70s. In contrast, a person born in the 1950s would have seen the stock market remain quite stable during his formative years. The person born in the 1970s, on the other hand, would have seen the stock market rise steadily throughout his adolescence and young adulthood, resulting in enormous gains. These two people have obviously had very different interactions with the stock markets and are therefore inclined to perceive the markets through different lenses. One born in the ’50s would naturally be wary of the stock market and skeptical of its capacity to generate riches. The generation born in the 1970s, on the other hand, is more likely to be bullish on the stock market and invest in shares. Considering that everyone’s opinion is colored by their own unique set of experiences rather than being solely based on objective factors like the state of the market, it stands to reason that at some point in time, everyone’s choice will be the wrong one.

Chance and taking a chance are two essential elements of any investment strategy. The two are mostly beyond of our hands, but they hold considerable sway over our actions and the returns on our investments. Let’s look at Bill Gates as an example; he’s not just one of the richest men on the planet, but he’s also one of the most talented and hardworking. Lucky for him, he went to one of the few high schools in 1968 that had access to a computer. This influenced his early outlook and preferences. Because of chance and danger, you should realize that the results of your actions are never completely in your control. You have to create room for other factors over which you may have little to no say. Extreme outcomes, whether positive or bad, have a low chance but must be considered nonetheless. Therefore, instead of zeroing in on specific people and case studies, it is more fruitful to examine overarching trends and then draw your own conclusion.

Don’t let the goalpost move!

It’s important to recognize when you’ve attained financial security and to quit seeking more. Many renowned people have met their end because of their insatiable appetite for wealth and power. When you’re always pushing yourself to achieve more, you’re more likely to take chances you shouldn’t. It’s important to know when to stop. Gaining the best possible rate of return is not the only criteria for successful investing. Instead, focus on maximizing profits over the largest time horizon possible. For sustainable financial success, focus on the power of compounding. There are numerous routes to financial success, but only one that guarantees long-term security: extreme thrift and a healthy dose of paranoia.

The wealthiest people are those who have managed to keep their wealth for an extended length of time, suggesting that survival is a key component of making good investments that yield reliable returns. Never put your money into a program that promises you the world, but instead invest in tried and true ways that have consistently produced positive results. Considerations such as a tight financial plan, adaptable thought processes, and a relaxed approach to time frames can all contribute to a solid investing portfolio. Having money isn’t the ultimate objective, and it won’t win you the admiration of your peers. The desire to amass wealth shouldn’t be motivated by thoughts like these. Don’t judge others based on how much money they have or don’t have, though.

The power of cost savings

It’s not so much how much money you make or how well your investments do as how much money you save. There are typically three sorts of people above a specific salary threshold. Those that put their savings first come first. Second, there are many who don’t think they make enough money to justify setting money down each month. And third, there are those who don’t believe saving is necessary. But in the long run, those in the first group are the ones who will be able to build and protect their money the best. Keep in mind that while it is possible to amass wealth without a sizable paycheck, it is impossible to do it and keep it growing without a sizable savings component. Since your savings is the difference between your ego and the income you receive, you should avoid spending it on unneeded and expensive products if you are serious about building wealth. When your wants and expenses are modest, your savings will be high and your savings will be worth more. Being practical and sensible with your money is just as vital as having a high savings rate. One effective method of doing this is to develop and keep to a long-term financial strategy that takes into account your own situation and needs.

Allow for some errors.

Never forget that you are dealing with possibilities, not guarantees, while making financial decisions. In other words, you should constantly make sure your assets have a sufficient margin of safety. It’s often believed this is the only surefire strategy to proceed with caution in a dangerous world. While there is no way to eliminate all risk, you can certainly plan beforehand. Spreading your bets and limiting reliance on any one component will get you the best results. Maintaining a sizable savings account for unexpected expenses is another sound financial practice.

To amass and keep vast fortune, nothing but our own actions and financial choices matter. The book argues that the things we’ve been through affect how well we can judge future investments based on what we know now. When we have a negative history with the stock market, we tend to make the mistake of clinging to our losing positions for too long and selling our winning ones too soon. Balanced Advantage mutual funds are a fantastic method to combat this tendency. Please allow me to explain what a mutual fund is before I tell you how Balanced Advantage Funds can assist you minimize the effect of your own biases and emotions on your investment choices. In this context, “investment vehicles” refers to vehicles that pool money from investors and then invest it in various assets. Skilled fund managers are in charge of them, and they invest according to a set plan. There are various types of mutual funds, with hybrid funds being one of them. You can think of Balanced Advantage Funds as a hybrid mutual fund. They diversify their portfolios among equities, debt, and futures, and adjust their holdings in each according to how each is performing. The main concept here is that a portfolio’s exposure to different asset classes, such as debt and stocks, is shifted according to a predetermined investment plan and triggers. As a result, even the fund managers’ inherent biases have much less of an effect on the final investment decision. Consequently, the Balanced Advantage Fund will raise its equity exposure when the market rises and gradually reduce it as the market falls. Investors benefit greatly from this switch between debt and equity because it removes the need to make strategic decisions about when and where to invest. The book also has some intriguing things to say about the different kinds of savers and spenders out there. Most people don’t save because they assume they don’t make enough money. For those who like to take things slowly, the SIP method of purchasing mutual funds may be the best option. An SIP allows you to invest a set amount of money at regular intervals into a mutual fund plan. The best part, though, is that you just need USD 500 to get started with a systematic investment plan. Those who consistently put money away can continue to reap the long-term rewards of compound interest and rupee-cost averaging by continuing to invest via SIPs. Moreover, if you are just starting out with saving, you can begin with small value SIPs and ramp up your investments as your income rises.

A Review of the Psychology of Money

The Psychology of Money is a must-read for everyone who has ever felt hopeless about their financial situation or who has ever doubted their ability to become wealthy. After reading it, you’ll be more open to alternative points of view and more likely to reflect on your own biases. Although this book is unlikely to bring you any solace, it will provide you with a list of things you can do to better your financial situation right away.

To whom would I give a reccomendation of The Psychology of Money?

A person in their twenties who feels financially behind and wants to get out of that circumstance; a person in their forties who works as a life coach and wants to learn more to better assist her customers; a person in their twenties who is studying economics and wants to learn more; and so on.

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