A Review of “The Psychology of Money” by Morgan Housel


Initial caveats:

  1. Morgan’s reputation for clear, broad-based writing is deserved. I read his blog at COLLABORATIVE FUND periodically. It is thoughtful on financial topics and it brings a level of heart and perception that is absent from wealth management. His is a unique voice that would be squelched by the typical compliance regime.
  2. I was jealous of the success of this book before it even came out! Judging by the attention, it will sell 100,000 copies. Congratulations in advance, Morgan! (If this creeps into my criticism here, you can clap back at me with full volume.)
  3. I don’t think Morgan and I have ever spoken though I think we have traded tweets in the past.
  4. I wrote a book to capture my thoughts about wealth (“WEALTH ACTUALLY“- link at the bottom). We tackle many similar concepts but from different angles and time horizons (and, boy, do we agree on the power of compounding and the effect of time). I think our books pair well together along with Brian Portnoy’s “THE GEOMETRY OF WEALTH” and “THE BEHAVIORAL INVESTOR” by Daniel Crosby.
  5. Like I did with the latest Halloween remake, I over-trailered myself on this one. I use that term when I consume trailers, commentary and reviews of something that I want to see/read to the point where I ultimately reduce the experience of the actual art. Many twitter friends and colleagues breathlessly recommended Morgan’s POM and I caught up on old and new interviews and reviews with him. It reduced the impact of many of Morgan’s examples and bon mots for me (as I already heard some of them). This is not his fault.
  6. I found myself nodding in agreement often. That is always a good sign because Morgan is confirming for me that my years of training and experience line up with an expert!

Ok . . . on with the show.

Morgan uses a variety of stories and anecdotes to to flesh out the financial and investing lessons that he has learned and observed over the course of his career. His main premise is that individual psychology is the chief impediment to making good decisions around investing. Each of 20 terse chapters focuses on one facet of the relationship between the brain and money that often leads to counterintuitive results. It is not overly wonky, nor numerically dense. This helps keep the pace moving.

It inevitably corrals examples of titans in our capitalist society like Bill Gates and Warren Buffett. It uses these examples to skewer some sacred cows. These include the role of genius in success and the “predestined eventuality” we all fall prey to when analyzing the stories of “greatness” without analyzing the role of luck and the cataloguing of 1000s of failures that complement them. Morgan reminds us of those failures (and of other important attributes like the usefulness of time and margin of error) in the context of our own decision-making . . . without being a downer!

Where does this book work?

“The Psychology of Money”, in and of itself, isn’t groundbreaking in the world of behavioral finance. Many of the concepts covered in the book are familiar to those in the industry.

However, Morgan spent a lot of time organizing his thoughts before writing the book and this effort shows in its compact nature. The first 19 chapters lay out various financial concepts and uses real world examples to recount the hows and why people make certain financial decisions.

It starts with Morgan’s initial comparison of a civil servant (who’s frugal lifestyle, saving and investing netted him a sizable nest egg at the end of his life) to an internet entrepreneur who amused himself by throwing gold coins into the ocean only to find his fortunes eventually run up on the rocks themselves. Morgan does a good job of keeping the data and the numbers to a minimum. It would be very easy to bulldoze the audience with charts to prove his points. Instead, he has the confidence to use his true talent- the story telling to illustrate his points.

The 20th chapter deals with his personal relationship with money (the best chapter IMO). It’s Morgan’s example curation and the storytelling that is the winning feature in the bulk of the book. It is the dissection of his personal experience that is the best part of the book . . . and shows us the “real” psychology behind money.

I really liked that Morgan gives the reader permission to make his/her own financial decisions. There are times when the “textbook”, while helpful, doesn’t apply fully. He has a firm grasp of the importance of human nature. (The anarchist in me enjoyed many backdoor criticisms of the #fintwit financial advice industrial complex including the “sameness” of advice and its numerous conflicts).

The book fights hard to be concise and I appreciated being able to get through it quickly (A day and a half). I admit I started to hydroplane over some of the pages 2/3 of the way through the book. The good news is that my attention would get back to the book quickly.

Where does the book miss the mark?

Alas, nothing is perfect.

I deal in structure and conflict in wealth and I was disappointed to see less of a multi-generational view of investing or the impact of divergent viewpoints on wealth, spending, and divorce on investing decisions. Given the importance that he places on time and communication, his insights here would be welcome. A famous post of his involves a LETTER TO HIS DAUGHTER regarding wealth that is poignant and might have been a better addition than the bolted on summary of the American Consumer at the end. Here is a link to it: https://www.collaborativefund.com/blog/financial-advice-for-my-new-daughter/

I was a bit surprised that there wasn’t more mention of investing in one’s self. There are many usual bromides around developing your “edge” and making sure that this is supported financially.

I kept expecting more mention of the “disease” of being right vs making money / long term financial goals. This is different from greed. Dopamine has a big impact on decision-making. Power, the perception of control, and arrogance have caused a lot of investment ruin in my experience. Morgan deals with this in the “More” section, but I’d be curious to see his findings of people who gunned it with more meager resources than Mark Zuckerberg famously turning down offers to buy Facebook.

Morgan alludes to the concept of current income vs asset-based “wealth” and tries to distinguish between being “rich” and “wealthy”. I have my own opinions on that. I thought the distinction between cash flow and asset ownership, the balance between the two and the moment of truth in retirement when you have to convert from one type of wealth and another could have received some more attention.

There is a post-script on the “Brief History of the Way the American Consumer Thinks the Way they Do.” I liked it and found it to be useful, but it felt bolted on to the overall continuum of the book.

Additionally, Morgan’s examples almost completely avoid women (except in chapter 20- see “Finally . . .”) or people of color. The absence was glaring. I almost never pound the table on this type of thing, but in describing the psychology of money, there are many useful truths in these examples that should be explored. This is especially important for middle-aged white males like myself that need to understand other groups’ thoughts, fears, and nuances better in order to give the best advice possible. Perhaps, his future writings will center around these experiences.

Finally . . .

Chapter 20- in which Morgan describes his own thought process and family communication around money- is, BY FAR, the best and most insightful in the book. By turning his sharp mind on the financial subject he knows best . . . his own, Morgan helps us get to the truths of why people choose certain financial paths and why there can be logic in the decisions that don’t follow the traditional textbook. I wish this had come earlier. I think it would have added even more depth to the first 19 chapters.

In Summary,

This is a fabulous book to read in your 20s and early 30s as you begin to make life decisions of financial consequence and develop your personal relationship with money.

For those of us who are older, there are many great explainers in the text and plenty of things that can be worked on. My former Latin teacher in high school, Peter Brush, said something that always stayed with me, “There is only one thing that is certain in life. People will commit folly.” This book does a really good job of explaining how that is the case with decisions around investing.

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