The Psychology of Money

Housel claims that while “some people do crazy things with money” no one actually is completely irrational, since all people are simply acting on different beliefs based on their own experiences (14). For example, someone who experienced poverty as a child perceives risk very differently than someone who works as an investment banker. As such, Housel attributes people’s vastly different approaches to finance to their “different lives shaped by different and equally persuasive experiences” (14). Housel uses John F. Kennedy as an example: The president admitted that his only knowledge about the Great Depression was from reading about it, since he grew up in a very wealthy family. As a result, he could not relate to the trauma that many people experienced during the 1930s.

The author cites a study by economists Ulrike Malmendier and Stefan Nagel that examined 50 years’ worth of consumer behavior. The study found that most people made decisions based on experiences they had as young adults. For instance, if they came of age during a strong stock market, they were more likely to invest more of their money in stocks throughout their lives. This led the researchers to conclude that people’s financial decisions and attitude to risk were largely based on their “personal history” (16). Housel includes charts showing stocks and inflation over recent decades to show how people of different generations would have different experiences of both of these aspects of finance.

Housel argues that these examples demonstrate how unreasonable it is to expect people of different nationalities, generations, and personal backgrounds to perceive money and respond to financial advice in the same way. While people can make misinformed and disastrous financial decisions, Housel claims that “every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check” (21). For example, to Housel, it seems illogical that Americans with the lowest income would spend the little savings they have on lottery tickets, but when considered from their own perspective about their finances, it is more understandable. Housel emphasizes that people don’t make financial decisions solely from hard facts (22).

Despite currency’s long history, managing one’s personal finances is a relatively new topic. For example, retirement, social security, 401(k), hedge funds, mortgages, credit cards, and college education loans were not widely experienced until the last couple of generations. Housel argues that people make seemingly illogical decisions about things such as savings and student loans because they do not have “accumulated experience to even attempt to learn from” (24). Housel concludes his chapter by reiterating, “[W]e’re all relatively new to this game and what looks crazy to you might make sense to me” (25).

Housel considers luck and risk “siblings” that can both influence people’s lives and have nothing to do with their hard work or effort (27). The author points to Bill Gates as an example of how luck can play an important role in shaping someone’s success. In the late 1960s, Gates attended a high school with a computer, which was a rarity in those days. Gates admits that without this opportunity, he would not have been able to invent Microsoft.

Housel claims that people neglect to consider the role luck plays in people’s success for two reasons: It is rude to attribute someone’s success to luck, and it is impossible to know exactly how much luck influenced their outcome. For this reason, people prefer “simple stories” to understand success and failure, which Housel believes can be “devilishly misleading” (31). Housel laments that in mainstream finance culture, investors who made average or risky decisions that made them rich are likely to be held up as examples to the rest of us, even though no one can replicate their success without the same luck. For example, Cornelius Vanderbilt made a fortune building railroads through New York, even though he violated New York law in doing so. Since he got away with it, people are tempted to view recklessness as a key trait for success, yet Housel argues that Vanderbilt could just as easily have become an example of failure.

The author argues that this story demonstrates that, “The line between ‘inspiringly bold’ and ‘foolishly reckless’ can be a millimeter thick and only visible with hindsight. Risk and luck are doppelgangers” (34). Housel urges the reader to not focus their attention on specific “extreme characters” such as Vanderbilt or Gates, but to study “broad patterns of success” instead (35-36). He also advises the reader to acknowledge the role of both luck and risk in their successes and failures so that they neither become overconfident nor judge themselves too harshly.

Housel shares several anecdotes that demonstrate why it is important to recognize when one has enough wealth and to appreciate what one has. He shares the story of Rajat Gupta, who, in spite of being a multimillionaire, participated in insider trading to increase his wealth. He went to prison and lost his good reputation as well as his career. Housel attributes this kind of downfall to not having a “sense of enough” (40). According to Housel, “The hardest financial skill is getting the goalpost to stop moving” (41). He urges the reader to keep their ambitions in check and to never risk the wealth they have already earned to access greater wealth they do not really need. Housel blames “social comparison” for brewing envy, as it can make people feel that they do not have enough and motivate reckless financial decisions (42). Housel concludes his chapter by recommending that the reader should always have a “sense of enough” and prioritize the “invaluable” parts of their lives, such as their family, reputation, independence, and happiness (44).