3 January 2025

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

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

Voltaire’s observation that “History never repeats itself; man always does.” It applies so well to how we behave with money.

1. No One’s Crazy

People do some crazy things with money. But no one is crazy. Here’s the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.

Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behavior. We all think we know how the world works. But we’ve all only experienced a tiny sliver of it.

2. Luck & Risk

risk and luck are so hard to pin down. There are so many examples of this. Countless fortunes (and failures) owe their outcome to leverage. The best (and worst) managers drive their employees as hard as they can. “The customer is always right” and “customers don’t know what they want” are both accepted business wisdom.

The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money.

as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures. Nothing is as good or as bad as it seems.

3. Never Enough

John Bogle, the Vanguard founder who passed away in 2019, once told a story about money that highlights something we don’t think about enough: At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.”

The hardest financial skill is getting the goalpost to stop moving.

It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction. In that case one step forward pushes the goalpost two steps ahead. You feel as if you’re falling behind, and the only way to catch up is to take greater and greater amounts of risk.

Happiness, as it’s said, is just results minus expectations.

The idea of having “enough” might look like conservatism, leaving opportunity and potential on the table. I don’t think that’s right. “Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.

Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.

4. Confounding Compounding

There were plenty of theories about why ice ages occurred: (...) the gravitational pull of the sun and moon gently affect the Earth’s motion and tilt toward the sun. During parts of this cycle — which can last tens of thousands of years — each of the Earth’s hemispheres gets a little more, or a little less, solar radiation than they’re used to.

It begins when a summer never gets warm enough to melt the previous winter’s snow. The leftover ice base makes it easier for snow to accumulate the following winter, which increases the odds of snow sticking around in the following summer, which attracts even more accumulation the following winter. Perpetual snow reflects more of the sun’s rays, which exacerbates cooling, which brings more snowfall, and on and on. Within a few hundred years a seasonal snowpack grows into a continental ice sheet, and you’re off to the races. The same thing happens in reverse. An orbital tilt letting more sunlight in melts more of the winter snowpack, which reflects less light the following years, which increases temperatures, which prevents more snow the next year, and so on. That’s the cycle. The amazing thing here is how big something can grow from a relatively small change in conditions. You start with a thin layer of snow left over from a cool summer that no one would think anything of and then, in a geological blink of an eye, the entire Earth is covered in miles-thick ice.

The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results.

His skill is investing, but his secret is time. That’s how compounding works. Think of this another way. Buffett is the richest investor of all time. But he’s not actually the greatest — at least not when measured by average annual returns. Jim Simons, head of the hedge fund Renaissance Technologies, has compounded money at 66% annually since 1988. No one comes close to this record. As we just saw, Buffett has compounded at roughly 22% annually, a third as much. Simons’ net worth, as I write, is $21 billion. He is — and I know how ridiculous this sounds given the numbers we’re dealing with — 75% less rich than Buffett. Why the difference, if Simons is such a better investor? Because Simons did not find his investment stride until he was 50 years old. He’s had less than half as many years to compound as Buffett.

Linear thinking is so much more intuitive than exponential thinking.

There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait. It’s just one page with a long-term chart of economic growth.

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. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.

5. Getting Wealthy vs. Staying Wealthy

Getting money is one thing. Keeping it is another.

Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.

No one wants to hold cash during a bull market. (...) But if that cash prevents you from having to sell your stocks during a bear market, the actual return you earned on that cash is not 1% a year — it could be many multiples of that, because preventing one desperate, ill-timed stock sale can do more for your lifetime returns than picking dozens of big-time winners.

Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time — especially in times of chaos and havoc — will always win.

Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality. A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes room for error.

If there’s enough room for error in your savings rate that you can say, “It’d be great if the market returns 8% a year over the next 30 years, but if it only does 4% a year I’ll still be OK,” the more valuable your plan becomes.

A barbelled personality — optimistic about the future, but paranoid about what will prevent you from getting to the future — is vital.

6. Tails, You Win

Some tail-driven industries are obvious. Take venture capital. If a VC makes 50 investments they likely expect half of them to fail, 10 to do pretty well, and one or two to be bonanzas that drive 100% of the fund’s returns.

The Russell 3000 has increased more than 73-fold since 1980. That is a spectacular return. That is success. Forty percent of the companies in the index were effectively failures. But the 7% of components that performed extremely well were more than enough to offset the duds.

Warren Buffett said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them.

When we pay special attention to a role model’s successes we overlook that their gains came from a small percent of their actions.

7. Freedom

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”

Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.

A small amount of wealth means the ability to take a few days off work when you’re sick without breaking the bank. Gaining that ability is huge if you don’t have it. A bit more means waiting for a good job to come around after you get laid off, rather than having to take the first one you find. That can be life changing. Six months’ emergency expenses means not being terrified of your boss, because you know you won’t be ruined if you have to take some time off to find a new job.

More still means the ability to take a job with lower pay but flexible hours. Maybe one with a shorter commute. Or being able to deal with a medical emergency without the added burden of worrying about how you’ll pay for it. Then there’s retiring when you want to, instead of when you need to. Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.

On my first day I realized why investment bankers make a lot of money: They work longer and more controlled hours than I knew humans could handle. Actually, most can’t handle it. Going home before midnight was considered a luxury, and there was a saying in the office: “If you don’t come to work on Saturday, don’t bother coming back on Sunday.” The job was intellectually stimulating, paid well, and made me feel important. But every waking second of my time became a slave to my boss’s demands, which was enough to turn it into one of the most miserable experiences of my life.

doing something you love on a schedule you can’t control can feel the same as doing something you hate.

9. Wealth is What You Don’t See

Singer Rihanna nearly went bankrupt after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?” You can laugh, and please do. But the answer is, yes, people do need to be told that. When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.

Wealth is an option not 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.

most people, deep down, want to be wealthy. They want freedom and flexibility, which is what financial assets not yet spent can give you. But it is so ingrained in us that to have money is to spend money that we don’t get to see the restraint it takes to actually be wealthy. And since we can’t see it, it’s hard to learn about it.

10. Save Money

In a world where intelligence is hyper-competitive and many previous technical skills have become automated, competitive advantages tilt toward nuanced and soft skills — like communication, empathy, and, perhaps most of all, flexibility. If you have flexibility you can wait for good opportunities, both in your career and for your investments. You’ll have a better chance of being able to learn a new skill when it’s necessary. You’ll feel less urgency to chase competitors who can do things you can’t, and have more leeway to find your passion and your niche at your own pace. You can find a new routine, a slower pace, and think about life with a different set of assumptions. The ability to do those things when most others can’t is one of the few things that will set you apart in a world where intelligence is no longer a sustainable advantage.

Having more control over your time and options is becoming one of the most valuable currencies in the world.

11. Reasonable > Rational

After some tragic trial and error his experiment worked. Wagner-Jauregg reported that 6 in 10 syphilis patients treated with “malariotherapy” recovered, compared to around 3 in 10 patients left alone. He won the Nobel Prize in medicine in 1927.

A one-degree increase in body temperature has been shown to slow the replication rate of some viruses by a factor of 200. “Numerous investigators have identified a better outcome among patients who displayed fever,” one NIH paper writes.

If fevers are beneficial, why do we fight them so universally? I don’t think it’s complicated: Fevers hurt. And people don’t want to hurt. That’s it.

It may be rational to want a fever if you have an infection. But it’s not reasonable. That philosophy — aiming to be reasonable instead of rational — is one more people should consider when making decisions with their money. Academic finance is devoted to finding the mathematically optimal investment strategies. My own theory is that, in the real world, people do not want the mathematically optimal strategy.

They want the strategy that maximizes for how well they sleep at night.

12. Surprise!

Stanford professor Scott Sagan once said something everyone who follows the economy or investment markets should hang on their wall: “Things that have never happened before happen all the time.” History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future. Do you see the irony? Do you see the problem? It is smart to have a deep appreciation for economic and investing history. History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future. A trap many investors fall into is what I call “historians 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.

The thing that makes tail events easy to underappreciate is how easy it is to underestimate how things compound. How, for example, 9/11 prompted the Federal Reserve to cut interest rates, which helped drive the housing bubble, which led to the financial crisis, which led to a poor jobs market, which led tens of millions to seek a college education, which led to $1.6 trillion in student loans with a 10.8% default rate. It’s not intuitive to link 19 hijackers to the current weight of student loans, but that’s what happens in a world driven by a few outlier tail events.

Realizing the future might not look anything like the past is a special kind of skill that is not generally looked highly upon by the financial forecasting community.

The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next. The most important economic events of the future — things that will move the needle the most — are things that history gives us little to no guide about. They will be unprecedented events. Their unprecedented nature means we won’t be prepared for them, which is part of what makes them so impactful. This is true for both scary events like recessions and wars, and great events like innovation.

13. Room for Error

There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone — not consistently, anyways. You have to give yourself room for error. You have to plan on your plan not going according to plan.

“the purpose of the margin of safety is to render the forecast unnecessary.” It’s hard to overstate how much power lies in that simple statement.

The solution is simple: Use room for error when estimating your future returns. This is more art than science. For my own investments, which I’ll describe more in chapter 20, I assume the future returns I’ll earn in my lifetime will be ⅓ lower than the historic average. So I save more than I would if I assumed the future will resemble the past. It’s my margin of safety. The future may be worse than ⅓ lower than the past, but no margin of safety offers a 100% guarantee. A one-third buffer is enough to allow me to sleep well at night. And if the future does resemble the past, I’ll be pleasantly surprised.

The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking.

To get around this, I think of my own money as barbelled. I take risks with one portion and am terrified with the other. This is not inconsistent, but the psychology of money would lead you to believe that it is. I just want to ensure I can remain standing long enough for my risks to pay off. You have to survive to succeed. To repeat a point we’ve made a few times in this book: The ability to do what you want, when you want, for as long as you want, has an infinite ROI.

A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure. Some people are remarkably good at avoiding single points of failure. Most critical systems on airplanes have backups, and the backups often have backups. Modern jets have four redundant electrical systems. You can fly with one engine and technically land with none, as every jet must be capable of stopping on a runway with its brakes alone, without thrust reverse from its engines. Suspension bridges can similarly lose many of their cables without falling.

The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.

Predicting what you’ll use your savings for assumes you live in a world where you know exactly what your future expenses will be, which no one does. I save a lot, and I have no idea what I’ll use the savings for in the future. Few financial plans that only prepare for known risks have enough margin of safety to survive the real world. In fact, the most important part of every plan is planning on your plan not going according to plan.

14. You’ll Change

It is one thing to say, “We don’t know what the future holds.” It’s another to admit that you, yourself, don’t know today what you will even want in the future. And the truth is, few of us do. It’s hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift. The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future. Harvard psychologist Daniel Gilbert once said:

At every stage of our lives we make decisions that will profoundly influence the lives of the people we’re going to become, and then when we become those people, we’re not always thrilled with the decisions we made. So young people pay good money to get tattoos removed that teenagers paid good money to get. Middle-aged people rushed to divorce people who young adults rushed to marry. Older adults work hard to lose what middle-aged adults worked hard to gain. On and on and on.

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.

Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum.

Sunk costs — anchoring decisions to past efforts that can’t be refunded — are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves.

Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimize future regret. The quicker it’s done, the sooner you can get back to compounding.

15. Nothing’s Free

Like most products, the bigger the returns, the higher the price. Netflix stock returned more than 35,000% from 2002 to 2018, but traded below its previous all-time high on 94% of days. Monster Beverage returned 319,000% from 1995 to 2018 — among the highest returns in history — but traded below its previous high 95% of the time during that period. Now here’s the important part. Like the car, you have a few options: You can pay this price, accepting volatility and upheaval. Or you can find an asset with less uncertainty and a lower payoff, the equivalent of a used car. Or you can attempt the equivalent of grand-theft auto: Try to get the return while avoiding the volatility that comes along with it. Many people in investing choose the third option. Like a car thief — though well-meaning and law-abiding — they form tricks and strategies to get the return without paying the price. They trade in and out. They attempt to sell before the next recession and buy before the next boom.

Some car thieves will get away with it. Many more will be caught and punished. Same thing with investing. Morningstar once looked at the performance of tactical mutual funds, whose strategy is to switch between stocks and bonds at opportune times, capturing market returns with lower downside risk.

Morningstar wrote: “With a few exceptions, [tactical funds] gained less, were more volatile, or were subject to just as much downside risk” as the hands-off fund.

Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns? The answer is simple: The price of investing success is not immediately obvious.

Market returns are never free and never will be. They demand you pay a price, like any other product. You’re not forced to pay this fee, just like you’re not forced to go to Disneyland. You can go to the local county fair where tickets might be $10, or stay home for free. You might still have a good time. But you’ll usually get what you pay for. Same with markets. The volatility/uncertainty fee — the price of returns — is the cost of admission to get returns greater than low-fee parks like cash and bonds. The trick is convincing yourself that the market’s fee is worth it.

16. You & Me

the decisions made sense to them when they were made. Blaming bubbles on greed and stopping there misses important lessons about how and why people rationalize what in hindsight look like greedy decisions.

What do you expect people to do when momentum creates a big short-term return potential? Sit and watch patiently? Never. That’s not how the world works. Profits will always be chased. And short-term traders operate in an area where the rules governing long-term investing — particularly around valuation — are ignored, because they’re irrelevant to the game being played. That’s where things get interesting, and where the problems begin. Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.

When a commentator on CNBC says, “You should buy this stock,” keep in mind that they do not know who you are. Are you a teenager trading for fun? An elderly widow on a limited budget? A hedge fund manager trying to shore up your books before the quarter ends? Are we supposed to think those three people have the same priorities, and that whatever level a particular stock is trading at is right for all three of them? It’s crazy. It’s hard to grasp that other investors have different goals than we do, because an anchor of psychology is not realizing that rational people can see the world through a different lens than your own. Rising prices persuade all investors in ways the best marketers envy. They are a drug that can turn value-conscious investors into dewy-eyed optimists, detached from their own reality by the actions of someone playing a different game than they are.

17. The Seduction of Pessimism

Optimism is the best bet for most people because the world tends to get better for most people most of the time. But pessimism holds a special place in our hearts. Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.

Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.

Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention. If a smart person tells me they have a stock pick that’s going to rise 10-fold in the next year, I will immediately write them off as full of nonsense. If someone who’s full of nonsense tells me that a stock I own is about to collapse because it’s an accounting fraud, I will clear my calendar and listen to their every word.

When you realize how much progress humans can make during a lifetime in everything from economic growth to medical breakthroughs to stock market gains to social equality, you would think optimism would gain more attention than pessimism. And yet.

But a few other things make financial pessimism easy, common, and more persuasive than optimism. One is that money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.

Stocks rising 1% might be briefly mentioned in the evening news. But a 1% fall will be reported in bold, all-caps letters usually written in blood red. The asymmetry is hard to avoid.

And while few question or try to explain why the market went up — isn’t it supposed to go up? — there is almost always an attempt to explain why it went down.

Another is that pessimists often extrapolate present trends without accounting for how markets adapt.

A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore.

It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together. Consider the progress of medicine. Looking at the last year will do you little good. Any single decade won’t do much better. But looking at the last 50 years will show something extraordinary.

Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about. Maybe that’s why it’s so seductive. Expecting things to be bad is the best way to be pleasantly surprised when they’re not. Which, ironically, is something to be optimistic about.

19. All Together Now

Manage your money in a way that helps you sleep at night. That’s different from saying you should aim to earn the highest returns or save a specific percentage of your income. Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested. To each their own. But the foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions. If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.

Save. Just save. You don’t need a specific reason to save. It’s great to save for a car, or a downpayment, or a medical emergency. But saving for things that are impossible to predict or define is one of the best reasons to save. Everyone’s life is a continuous chain of surprises. Savings that aren’t earmarked for anything in particular is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment. Define the cost of success and be ready to pay it. Because nothing worthwhile is free. And remember that most financial costs don’t have visible price tags.

20. Confessions

Half of all U.S. mutual fund portfolio managers do not invest a cent of their own money in their funds, according to Morningstar.⁶⁹ This might seem atrocious, and surely the statistic uncovers some hypocrisy. But this kind of stuff is more common than you’d think. Ken Murray, a professor of medicine at USC, wrote an essay in 2011 titled “How Doctors Die” that showed the degree to which doctors choose different end-of-life treatments for themselves than they recommend for their patients.