The Psychology of Money - Timeless Lessons on Wealth, Greed, And Happiness by Morgan Housel

Book under review is based on American environment. Within first year of its  publication in India [2020] it has gone into 9th edition! Morgan Housel is highly decorated financial journalist with many prestigious awards under his belt. However, he himself is an example of how every hard working smart Alec has an equal chance of becoming rich in the United States. Housel’s book is not based on academic theories of finance. But on his observations of financial markets and personal experiences. 

In the chapter  No One is Crazy  he proves that “in theory people should make investment decisions  based on their goals and characteristics of the investment options available to them at the time. But that is not what people do.” With several illustration to prove his point he states “ We all do crazy stuff with money, because we’re all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy – we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.”

In the chapter Luck & Risk, he states that in a financial world where investment is mathematically established as a science, there is a very important element of Luck which may tilt the outcome of one’s financial decision, however wise or otherwise the decision might be. In the case of   Bill Gates, Housel says that not all his success can be totally attributed to his acumen alone.  Bill Gates has had several instances which should have changed the course of his destiny, but unexpected twists and turn saved him such that today he is what he is. 

In the  chapter Tails, You Win  the philosophy is “ You can be wrong half the time and still make a fortune.” Among several examples he provides to prove his philosophy Housel best quote is that of Walt Disney. “Disney’s first studio went bankrupt. His films were monotonously expensive to produce, and financed at outrageous terms. By the mid 1930s Disney had produced more than 400 cartoons. Most of them were short, most them were beloved by viewers, and most of them lost a fortune.  ..... Snow White and the Seven Dwarfs changed everything. The $8 million it earned in the first six months of 1938 was an order of magnitude higher than anything the company earned previously. It transformed Disney Studios...”

Then he illustrates how Venture Capitalists [VC] may lose in 99 percent of his ventures, but one successful venture might be such that all previous losses might be mitigated to keep him in the business. It is this Tails Win feature that keeps the VCs in positive state of mind in the financial market.

In the chapter Confessions Housel explains his own financial philosophy which stands totally in contrast with normal American way.  He has always maintained 20% savings, even if the interest earned is less than 2% P.A. He has always believed in keeping cash for any emergency than depend on credit cards. His investments have been on long term basis rather than earnings from  short term market chances. He has always believed in protecting his post retirement life. These confessions help in creating trust in his approach to money and investment. Sounds very Indian traditional financial practices!

In Postscript A Brief History of Why the U.S. Consumer Thinks the Way They Do Housel provides highlights of how the consumer in the United States has undergone fundamental transformation since 1945. Much more than the success of policies it is occurrence of series of events which lead to the prosperity that followed. Apart from cheap finance policy, it was the introduction of Credit Card system which acquired a variety of form over a period; and the emphasis on productivity in outputs that resulted in new prosperous American. Credit to Income ratio which was reluctantly low at 20 to 100 in 1950s has grown to 130 to 100 in 2007.  He shows how an egalitarian America today is facing a steep disparity in income and wealth. Keeping up with Joan’s has fundamentally corrupted the very psychology of money among the citizens. 

This book is not only very useful to today’s American investors but also to Indian IT & BT young Indians who have scope and temperment for investments. There is a  generational change with regard to credit in India. Credit Card is normal part of purse of every earning member in the family. Now that an average Indian is influenced by “American Way of Life” this book becomes highly relevant.

A very interesting and  useful book.