Blog 2023 12 16 The Psychology of Money: Timeless lessons on wealth, greed, and happiness by Morgan Housel

The Psychology of Money: Timeless lessons on wealth, greed, and happiness by Morgan Housel

As the title suggests, The Psychology of Money approaches our financial matters from a bit different angle. If you consider personal finances and saving money from a purely mathematical standpoint, then it’s easy to come up with black-and-white, absolute recommendations.

But money problems are more difficult because emotions are heavily influencing our decisions. Therefore while the book makes some absolute recommendations, it’s also more emphatetic towards different solutions and accepts the validity of different approaches. The author recognizes that with a certain background, we might not understand the motives of those with another background.

Let me share some important and/or interesting ideas from the book.

Wealth and respect

People often buy fancy stuff, huge houses, luxurious and/or sports cars because they want to enjoy the respect and attention of others. The reality is that people apart from the owners barely care about these possessions. They might not even notice them or they simply don’t give a fuck because they are busy with their own lives.

The author used to work as a car valet. There was a guy who always came with a nice sportscar, until one day the same person came with an old Honda. What happened? - asked the author. The loan defaulted and the car was taken away, answered the client.

What does this tell us?

The fact that you drive a fancy car doesn’t show how much money you have. It only tells you how much you don’t have - you either spent that money on the car or you never even had it. This also highlights the difference between being rich and being wealthy. According to the author’s definitions being rich means that you have a high income. But being wealthy means that you have a lot of unspent income. Therefore wealth is often hidden because people cannot see something you don’t have.

Being mostly reasonable is better than being rational

If you want to get wealthy, learning how to make loads of money is secondary. You have to learn how not to spend money. How to keep your wishes and wants on a low level. Saving money is essential and while it’s not bad if you have a goal such as saving up for a (downpayment of a) house or a car or whatever, you don’t need any particular reason to start saving money. You simply don’t know what is going to happen.

When it comes to saving, people can often get lost in the details and they might end up in analysis paralysis. People forget that you don’t need the perfect strategy, you should rather be consistent in saving money for a long time and make those deposits regularly. Compounding is key.

And there is one more thing to it. Choosing the objectively best strategy might not fit your personality and it would leave you with sleepless nights and lots of anxiety. Is it worth it?

Probably not.

You have to pick your strategy based on your ambitions and goals. One that lets you achieve them and also lets you sleep. It might not be optimal, but it can still be the best fit for you.

The history of the US consumer

How much money you have to save in order to get wealthy depends on how much you want to spend. If you spend little, you need little. But that’s clearly not the usual way today. If you look around at your home or at your friends’ homes, I am sure you can spot so many useless things.

We live in a society driven by consumption.

How did we end up here?

The book in its P.S. offers a fascinating explanation. Let me summarize it.

It all comes from the follow-up of World War II. In the 30s, Americans had to live through the great depression. As they were getting out of it, the war came. A war that also brought tremendous growth for the country in its GDP.

At the same time, during the war, everything was supporting the war efforts. There was a shortage of new homes, shortage of products. Consumption was down.

When the war ended, politicians were afraid that depression would come back. There were hundreds of thousands of young men to come back home, people who needed homes and wanted to start their families. People who needed jobs. People who had little money. The factories had to produce non-war products once again, products that had to be sold. But to whom? Europe was in ruins. Japan was in ruins.

They couldn’t rely on anyone else to buy stuff, but their own people.

So to avoid the great depression coming back, the government did everything to keep interest rates down and encouraged people to buy, buy and buy and forget about savings. The interest rates were not only low, they were even tax deductible!

Lots of new products and homes were built in better and better quality and with smaller and smaller efforts. Due to the great depression of the 30s, there were many inventions improving productivity and innovation which went unnoticed so far. First people were focusing on the economy, then on the war. In the 50s and 60s, it was high time that the society benefited from these.

This all went on until the 70s when interest rates increased and stayed for a long time. But the US consumer was born and was here to stay.

It took a good decade to break down the interest rates, but something inherently changed.

Until the 70s, in those 25-30 years, pretty much everyone had the same type of life. Of course, some had smaller homes, some had bigger. There were differences in revenues and in cars and homes, but those differences were not vast. A worker, a banker, and a doctor had very similar lives in principle. It was due to the fact that differences between classes were decreasing and economic gains were relatively equally distributed.

In the 80s, the interest rates went down once again and in the 90s, (not only) US citizens witnessed a great economic boom. The difference was that this time the distribution was completely different. President Clinton proudly presented in his 2000 State of the Union speech: “We have built a new economy.” Damn, he was right.

“The biggest difference between the economy of the 1945–1973 period and that of the 1982–2000 period was that the same amount of growth found its way into totally different pockets. […] Between 1993 and 2012, the top 1 percent saw their incomes grow 86.1 percent, while the bottom 99 percent saw just 6.6 percent growth.”

Is this a problem?

According to the author, the phenomenon is not necessarily a problem. It’s just a fact. The problem is in expectations. Before, most people had similar lifestyles. In the new economy, we’ve got to see how the rich live, first via the expanding number of TV shows and later through the Internet. And we thought that those nice cars and big houses were for us too. But people couldn’t afford those. So what did they start to do? Take on more and more loans. As we saw in 2008 and later, that is not sustainable.

So again what is the problem? The realities changed, but the expectations haven’t. If the disappointment and rage stay, it’ll probably lead to new solutions. History rolls on.


The Psychology of Money is an interesting book even for those who are self-conscious when it comes to money.

The author reminds us that money and wealth are not only about numbers but also about emotions. Yes, wealth is unspent money and riches is about income. But having enough and managing your expectations is a big emotional work.

If you don’t ace that part, you’ll either end up burnt out (trying to always make more) or unhappy (you cannot buy everything you want) or in a financial collapse because of all the debt. That characterizes quite well the society today. The Psychology of Money also gives quite a good explanation how we got there. A recommended read.

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