Since 2008, Morgan Housel has been a financial writer. Through his research, he concluded that human conduct and luck, as opposed to spreadsheets and analysis, are considerably more important in determining one's financial success. He elaborated his insights in the book Psychology of Money. This article is a summary.
In his book, The Psychology of Money, he discusses his findings, viewpoints, and method of handling money. He presents 18 related biases, flaws, behaviors, or attitudes that can impact your financial outcomes with a series of short stories and chapters. In this article, you will find a summary of The Psychology of Money with the key points and practical tips to improve your relationship with money and investment.
Lets start our summary!
About Morgan Housel
Morgan Housel is a leading economic analyst and was for years one of the star columnists for the Wall Street Journal. He is a Behavioral Investing expert and a partner at The Collaborative Fund, a venture capital firm that supports young companies moving the world forward.
In his book, The Psychology of Money, he examines how money circulates in an economy and how biases and emotions affect our financial decisions, and offers advice on how to think more clearly and make wiser financial decisions.
A summary of Psychology of Money is relevant to Happy Investors as we strive to become financially independent. The lessons from his book are partly about being smart about money, but also about investing in stocks. Indeed, Morgan Housel deliberately chooses ETF investing, despite his extensive experience with stocks. Interesting? Read the summary of Psychology of Money and possibly buy his book.
The success of ordinary people in business
Morgan Housel highlights the importance of the psychology of money, stating that the emotional state directly affects success in the financial world. In this sense, he affirms that any ordinary person can achieve enrichment only through the appropriate behavioral skills.
In some examples, it highlights how a conservative investor profile with little financial training can achieve great fortunes, patiently waiting for the returns on their shareholdings in leading companies.
By contrast, bankruptcy can destroy the wealth of a highly risk-averse billionaire in a heartbeat. Mere carelessness and high indebtedness end up suffocating and destroying assets.
In the world of finance, success is not achieved merely by making decisions that put your wealth at risk. Housel highlights the opinions of economists and money market professionals regarding prudence, the loyalty of the good businessman, and a series of other values that are not a sign of weakness, but strength.
Finally, it demonstrates how interpersonal skills have a high incidence of financial success. Contrary to the predictive models of architecture and engineering, finance is heavily influenced by human behavior. In this way, psychology becomes an essential tool to know the profile of the investor and his chances of success and failure.
Here are the 10 factors that influence the decision-making process of every successful investor.
Summary Psychology of Money: 10 Factors that influence the investor's decision-making process
Human beings act based on their convictions and considering that psychosocial factors are decisive in business success. Here are ten key points from Housel's book about the psychology of investment.
1. Life experience
The socialization process par excellence has its direct impact on human behavior. Thus, those who have lived in stable economies have a completely different view of saving and investment than those who have been besieged by hyperinflations and price imbalances. This position has been held since the beginning of the century by economists such as Milmendier and Nagel (2006).
2. Academic training
The fact of receiving a graduate or postgraduate university education also affects the behavior of the potential investor. Technical knowledge leads the person to carry out some analyses, projections, and studies that will not be considered by those who have not been intellectually-trained in that direction.
3. Information available
Each person, from their history, has access to various sources of information in decision making. Therefore, according to the previous points, the quality of the information that they have the possibility of acquiring will differ.
For example, the perspective of a sector of the poor population that spends their few savings on a lottery ticket is very different from those who have other alternatives such as the real estate market, the stock market, etc.
4. Luck and risks
The factor of luck, being in the right place at the right time, is another issue that affects the decision-making process and the success of financial investments. In contrast, risk is another issue that affects finances but also depends on unexpected factors.
Financial growth and power can blind the investor to his ambition. This can lead you to cross the limits until you lose everything. That is why a measured vision of investments and profits is vital.
It is no good trying to achieve everything at any cost. There must be a limit to the level of risk that you are willing to accept.
Talking about reaching a limit of sufficiency does not exactly mean conservatism. Not all investments are good enough to risk it all.
5. Socioeconomic level
Social and economic status is one of the factors that affect success in finances in the sense that it allows you to achieve exclusive opportunities. At this point, the author highlights how having access to certain circles of information and influence allows decisions to be made with a greater data matrix.
6. Behavior patterns
Another essential issue for success in finance is to consider the analysis of general behavior patterns. This is concentrating on the casuistry, trying to determine what the general trends are. For this, you can make your conclusions from statistical regression models, for example.
The time factor is very crucial in wealth growth. Simply put, a fortune does not magically grow from one moment to the next. Examples of great investors show hard work, trial, and error, successes, and failures, throughout a lifetime from early youth.
When measuring the profitability of investments, we should consider that sudden large rates are likely to fall at the same speed. In contrast, lower growth rates that are sustained and stable over time can allow for greater profits.
Another example of time is analysis. A good stock analysis is time consuming. In addition, you need to get to know the company and the sector. Invest within your circle of competence. That's how you get the highest returns.
Strategic planning is essential to achieving success in financial investments. Although there are many imponderable factors, forecasting leads to developing alternative plans to lessen the negative impact of failures. Hence the importance of having dynamic alternative plans and programs.
9. Balanced personality
The great investor has an optimistic personality, but at the same time has a share of skepticism and paranoia. A good balance of personality allows the investor to visualize the good and bad possibilities, making a more complete analysis of the strategy.
The vision of the financial investor must transcend superficial things, to find the hidden points of true importance for the business strategy to be carried out.
It is meaningful to consider that the most important data are not precisely those that appear at first glance.
What applies to Happy Investors: from experience we know that financial independence is an attractive concept. Especially for those who are young. We started out that way too. But the moment you are financially independent, and close to the big goal, then your insights change. You are older, wiser, and also see the world differently. You begin to realize that you don't want to retire early, but above all you want to enjoy life. Of your relationships. Of yourself.
Invest today. Invest money you can spare. And hold onto this long term. But enjoy in the here and now.
Summary Psychology of Money and Conclusion
This was a concise summary of Psychology of Money. This book is written in a casual, conversational style, making it simple to read. For each of the overlapping themes, Morgan Housel explains it using both short stories and empirical evidence.
In essence, the book synthesizes these key ideas: The best way to profit from investments is through compounding, which provides steady returns over a long period. Additionally, you should stick to your financial goals rather than attempting to impress other people. Realize when you've had enough and that gaining control over your time and life is more important than purchasing luxuries.
The ability to handle money well has more to do with behavior than intelligence. And even for really intelligent people, behavior is difficult to learn.
What do you find interesting about the summary of Pscyhology of Money? Let us know in the comments below. It's a useful and informative book to buy and study!