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54 pages 1 hour read

Morgan Housel

The Psychology of Money

Nonfiction | Book | Adult | Published in 2020

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Chapters 10-12Chapter Summaries & Analyses

Chapter 10 Summary: “Save Money”

Housel encourages the reader to save their money. He observes that some people do not think they can save anything, while others feel that they do not need to, and the author addresses both of these groups. Housel argues that while income and investment returns influence your financial health, your savings rate is the biggest factor in building wealth. Housel considers savings inherently more reliable as investments, since savings are guaranteed while investment returns are inherently risky. Housel calls wealth “the accumulated leftovers after you spend what you take in,” and considers long-term wealth “powered by your own frugality and efficiency” (95).

Housel questions the value of working more while overspending, since it can be easier to cut back on spending than to dedicate more hours to work. As such, he advises, “one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility” (97). Housel reiterates the value in having high self-esteem that does not depend on status symbols or external validation. He argues, “You can spend less if you desire less. And you will desire less if you care less about what others think of you […] money relies more on psychology than finance” (97, emphasis added).

While people often set aside money for a particular purpose, Housel recommends always saving some of your income whether you know how you will spend it or not. While it is more difficult to remember the “intangible benefits” of money, such as flexibility, options, and independence, they are just as important as the material things one can purchase. Accessible savings that do not earn any interest may give you an “extraordinary return” if they allow you to cope with an emergency or wait for the right investment opportunity (98). Housel argues that such flexibility is important in a globalized world in which intelligence is not as important a trait as it used to be.

Chapter 11 Summary: “Reasonable > Rational”

Housel advises the reader to aim for “reasonable” rather than purely “rational” decisions. He argues that everyone is an “emotional person” and not a “spreadsheet,” and so cannot be expected to follow a strictly rational set of financial rules (102). Housel argues that because people are inherently emotional and biased, they will not sustain a commitment to overly rational rules, and so it is better to embrace a “reasonable” middle ground.

Housel uses the analogy of doctors treating fevers. From a purely “rational” standpoint, fevers do not always need treatment because they can help the body fight infection. However, it is unreasonable to expect patients to suffer the discomfort of a fever when they go to the doctor to feel better. Therefore, treating fever symptoms with medicine represents a “reasonable” approach to the issue.

Housel argues that academic mathematicians and economists are always searching for the most rational way of managing money, without understanding that most people “do not want the mathematically optimal strategy. They want the strategy that maximizes how well they sleep at night” (104). He claims that some studies produce findings that are “technically true but contextually nonsense” (105-06). For example, one study suggested that younger savers should invest “two dollars of debt for every dollar of their own money” (106) and gradually decrease this leverage as they get older. Housel acknowledges that this plan may work “on paper” but condemns it as “absurdly unreasonable” since most people would not be comfortable with the risk involved (106).

Housel explores other reasonable, but not entirely rational, financial decisions, such as investing in companies you love and believe in, which will help you sustain your investments over the long haul, or investing in companies from your region or country, which can help give you confidence in them

Chapter 12 Summary: “Surprise!”

Housel examines an uncomfortable truth about financial predictions: No one can accurately predict exactly what will occur next, and history can be a poor guide to understanding the future.

Housel points out the irony that although “history is mostly the study of surprising events,” people often try to consult it “as an unassailable guide to the future” (111). He argues that people can become too dependent on “past data” to try to evaluate what will happen with the stock markets and their own investments. Housel is convinced that the world of finance is constantly changing and that no one is able to perfectly predict how events many develop. He urges the reader to not mythologize certain people who experienced historical events, since it does not necessarily make their predictions more accurate.

Housel argues that it is unpredictable “outlier” events that tend to create the most significant change in the economy (112), such as the Great Depression, the World Wars, September 11th, and the “dot com bubble” (112). Housel explains how surprising events can create several short- and long-term changes in the economy. For example, after 9/11 the Federal Reserve cut interest rates, which prompted the housing bubble, which eventually played a large role in the financial crisis. This caused an increase in unemployment in the US, prompting many young people to take out student loans for college. There is now a $1.6 trillion student loan debt, with 10% of debtors defaulting on their payments. Housel underlines the strange connection between the 9/11 attacks and the current student debt crisis, noting, “that’s what happens in a world driven by a few outlier tail events” (114).

Housel calls an inability to predict disasters a “failure of imagination” (115), since people tend to assume that previous problems are an appropriate guideline for possible issues in the future. As such the only real lesson we can learn from surprises is that “the world is surprising” (115). Another reason why studying history is not helpful for making financial predictions is the major changes that have occurred in recent decades, such as the 401(k), venture capital, or technology stocks. Housel points to Benjamin Graham’s book The Intelligent Investor, a classic in the financial genre that has little advice that is still applicable today. Graham even admitted that, due to the significant changes in the financial industry, some of his tactics were no longer feasible. As such, Housel advises the reader to take general lessons from history, like considering how fear, stress, and greed can influence people’s decision-making. He concludes with the reminder, “Historians are not prophets” (122).

Chapters 10-12 Analysis

Housel further emphasizes saving with a long-term strategy for wealth creation. To build on this theme, Housel offers advice on how to save more money. For example, he claims that saving some money could be easier than working overtime while still frequently overspending. His recommends always saving some income, even if it is in a no-interest savings account, because of savings’ usefulness in emergencies. He explains:

Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate (98).

Once again, Housel prioritizes freedom and options through wealth over materialism.

Housel urges the reader to closely examine their motivations for spending, claiming that much of our culture’s consumer behavior is the result of our “ego,” and not genuine need. He posits, “[S]pending beyond a pretty low level of materialism is mostly […] spend[ing] money to show people you have (or had) money” (97). Housel stresses that it is better to focus on one’s own goals than on other people’s perceptions of one’s success. He creates an idea of a financial role model with his characterization of successful people, writing, “People with enduring personal financial success—not necessarily those with high incomes—tend to have a propensity to not give a damn what others think about them” (97, emphasis added). These reminders emphasize the points Housel made in previous chapters about the contrast between being “rich” and being “wealthy,” while also reiterating his argument that being financially successful does not necessarily mean having a high income.

In “Reasonable > Rational,” Housel returns to psychology as an influence on people’s relationship with money. He characterizes all people as “emotional” and contrasts this emotional streak with a purely logical rationality (102). He criticizes the notion that finances can be managed completely rationally and mathematically, even though on the surface it seems that way. By questioning the usefulness of hyper-rational advice that few people would ever act on, Housel again confronts aspects of the finance industry that can lead people astray. He encourages the reader to think critically of financial strategies developed by academics and other professionals and to not feel pressured into adopting them.

The author furthers his criticism of the finance industry in his chapter “Surprise!” By questioning modern finance culture’s obsession with making predictions, Housel takes on popular financial figures and raises doubts about their predictions’ accuracy. For example, he criticizes some investors for being overly reliant on the past as a guide to the future, writing that there is “an overreliance on past data as a signal to future conditions” even though finance is “a field where innovation and change are the lifeblood of progress” (111). He uses Benjamin Graham’s The Intelligent Investor as an example of financial advice that is too dependent on certain historical conditions to remain relevant for long. Housel explains, “Graham died in 1976. If the formulas he advocated were discarded and updated five times between 1934 and 1972, how relevant do you think they are in 2020? Or will be in 2050?” (120).

Through these examples, the author advocates being wary of any financial “prophet” who makes specific claims about the direction of the economy or individual stocks, or who recommends specific investing strategies. It is always better, he asserts, to resist accepting specific advice or predictions from industry gurus.

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