Book Review: Psychology of Money by Morgan Housel

Written By: Cynthia Hudson, AFC® Candidate

Morgan Housel’s 2020 book, the Psychology of Money, is unlike most financial books you’ll pick up. This book is equally empowering for clients and professionals: For clients to gain insights into their relationships with money and for professionals as we support our clients in respectful, productive and effective ways. It is an easy read, filled with insightful anecdotes, an acceptable number of charts and no math! Each succinct chapter delves into one aspect of our relationship with money. Some of the lessons are straight-forward and others will provide challenging points to ponder. 

Chapter 1 – No One’s Crazy 

From the start, Housel dives into the “crazy” things people do with money and how behind every cringe financial act is a reason. As counselors, we will be more effective with our clients if we understand the thought processes behind those actions. 

Chapter 2 – Luck & Risk 

Chapter 2 reminds us that luck has a hand in outcomes. He reminds us to be kind to ourselves when luck derails our plans and look for for replicable tips in ordinary trends rather than copying specific pathways. 

Chapter 3 – Never Enough 

With increased income comes the temptation of lifestyle inflation. By exploring what “enough” looks like, we can stop moving the goalpost and achieve success. 

Chapter 4 – Confounding Compounding 

The power of compounding is mind-boggling, so in this chapter, Morgan illustrates this force using technology, ice ages and Warren Buffett’s net worth.  

Chapter 5 – Getting Wealthy vs. Staying Wealthy 

Financial resilience depends on surviving the bad days to try again in the future. Staying wealthy, therefore, is about making choices that prevent absolute ruin. In this chapter, Housel discusses the mindsets and types of decisions that create resilience. 

Chapter 6 – Tails, You Win 

Successful people often have a past littered with failure. Investing is similar. Therefore, being willing to persist in the face of disaster keeps us in the game for when a once-in-a-thousand-year event brings good rewards. 

Chapter 7 – Freedom 

While many people think of the things that wealth can bring, deep down, what most want is freedom. Rather than focus on the sacrificed things, emphasize the delicious flexibility that comes with financial stability. 

Chapter 8 – Man in the Car Paradox 

The shortest chapter in the book perfectly explains a simple truth that we all need to remember: No one is impressed by your cool stuff as much as you want them to be. 

Chapter 9 – Wealth is What You Don’t See 

Many get confused about what wealth really is. It appears to be luxury cars and nice clothes, but true wealth isn’t easily visible. Wealth is a fully funded emergency fund, robust retirement savings, and sleeping well at night.  

Chapter 10 – Save Money 

This chapter dives into savings: The power of a high savings rate, defining needs and the reasons to save (spoiler alert: there doesn’t have to be a reason). 

Chapter 11 – Reasonable > Rational 

While many want to be a “rational investor,” Housel argues that rationality may not serve us best. Instead, aiming to be reasonable can improve our ability to stay the course.  

Chapter 12 – Surprise! 

You may have heard that “past performance is not indicative of future results,” and that’s what Chapter 12 is about. Innovations and sharp declines will continue to surprise us, as they always have. 

Chapter 13 – Room for Error 

Generous room for error provides more circumstances where our clients can succeed. No one can predict all the ways that life gets complicated, so helping our clients incorporate leeway into their planning provides flexibility and promotes resilience. 

Chapter 14 – You’ll Change 

People change and our financial strategies should reflect that. Aiming for moderation and a willingness to pivot can prevent living a life of frustration. 

Chapter 15 – Nothing’s Free 

Beyond the commissions and fees that we expect, there are additional costs involved in finance, such as volatility and uncertainty. By reframing these as costs of admission rather than fines to be avoided, we can reduce the stress we experience as we pay them. 

Chapter 16 – You & Me 

Clients hear financial advice from many people: TV, coworkers, their relatives. Not all of it is wrong, but not all of it is right for everyone. We must consider who the advice is for and whether their goals and values are in alignment with our own. 

Chapter 17 – The Seduction of Pessimism 

It can be hard to keep a level head when we are constantly hearing that the end is near. This section encourages reframing of these volatile moments so we can remain confident through the uncertainty. 

Chapter 18 – When You’ll Believe Anything 

No one can know everything, so we fill in the gaps to the best of our ability. This can cause issues when we fall for a scam, buy the snake oil, or make poor decisions based on erroneous beliefs. Rather than assume we know it all, we can learn to sit with the discomfort of knowing just how much we don’t know. 

Chapter 19 – All Together Now 

This chapter is a summary of the book’s tips and considerations. Busy readers can start with this chapter to get them thinking, then bounce back to other chapters as time or need allows. 

Chapter 20 – Confessions 

This chapter is delightful vulnerability. Housel confesses his dark secrets such as finding comfort in a paid-off mortgage, despite knowing it is non-optimized. By leaving us with his confession, he gives us permission to manage our money in a way that lets us sleep at night.  

Postscript – A Brief History of Why the U.S. Consumer Thinks the Way They Do 

Housel leaves us with the story of how we got here. Beginning with the end of World War II, the story winds through increases in consumer debt, the creation of the American consumer and the 2008 recession. It ends with the uncertainty in which we still find ourselves: political division, protests, and a deep-seated feeling that “this isn’t working.” While this is a messy place, he leaves us with the hope that economics have always been a story of cycles. 

The Psychology of Money is a beacon for both layperson and professional alike. For our clients, this book provides peace that they don’t have to be perfect to be perfectly fine. For professionals, it provides insights on honoring the human in our clients. Rather than fight against their feelings and fears, it is acceptable to find sustainable methods to build their financial security. With this mindfulness, we can reduce their resistance, prevent causing harm and nurture a healthy relationship with money.