A wise man once said: 

“One of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.”

― Morgan Housel,

In this reflection essay, Morgan Housel’s most popular book, “The Psychology of Money” will be the main character, serving to teach us what happens behind the scenes in our minds when it comes to money. The idea is to dive deeper into the behavioral patterns and thought habits that occur in all of us when it comes to money, whether that means spending money, saving money, wasting money or even using money as a status symbol. Being financially smart has nothing to do with intelligence and everything to do with behavior, which can be a tricky thing to adapt to, but it is possible. Traditional financial education is based on numbers, statistics, data and formulas, but in reality the concept of money is too broad to be explained on spreadsheets alone. Financial decisions happen in person, whether that is during corporate board meetings or across fancy dinners, they happen during real life interactions between people, where psychology plays a huge role.

 Housel carries a strong belief that these traditional ways in which we are educated about money as a math subject instead of a psychological subject is one of the biggest reasons we as humans have not adapted our financial skills over the years as rapidly as we have developed skills in other areas like  farming and science. Trial and error has not developed our financial thinking in terms of personal finances, debt, savings or how money influences our levels of happiness. He drew inspiration to write this book based on the financial crisis in 2008, where Housel noticed that no one could thoroughly explain exactly what happened, why it happened or how to move forward from it. He directly compared this global recession to a bridge that has collapsed. This is where he observed that in the case of a bridge collapsing, engineers can always determine a main cause for the collapse, because there is always a mutual consensus about the cause of damage: with a certain amount of force it would break. This can be determined through using laws of physics, because they are not controversial. But in the case of the 2008 recession, no one could determine a clear cause and that is why he drew the conclusion that finance is determined by human behavior. Therefore it cannot fall into the category of math and physics, but rather of human psychology and history. 

“To grasp why people bury themselves in debt you don’t need to study interest rates, you need to study the history of greed, insecurity and optimism.”

In Housel´s book he wrote about 20 behavioral patterns that he has observed during his years of research. In this essay we will focus on 3 that have stood out to me personally.

1. Luck and risk

Luck and risk revolves around the probability of certain outcomes in our lives. Professor Scott Galloway at NYU emphasizes the idea that when it comes to personal success or other people’s success, it is always good to keep in mind “nothing is as good or as bad as it seems.” 

The theory of luck can be clearly explained through looking at the story of how Bill Gates became one of the most successful people of this century. Throughout this story, it is important to keep in mind that Gates went to one of the only high schools in the world that had a computer at that time. The probability of that specific high school (Lakeside school) having a computer itself proves the theory of luck and risk. Bill Dougall, a retired WWII navy pilot who became a math and science teacher, fought for Lakeside school to lease a 3 000 dollar Teletype computer to introduce new ways of time-shared technology to his students. University graduates at that time did not even have the same opportunity to use computers as Gates had in 8th grade. At the age of 13, Gates met his classmate Paul Allen who was just as obsessed with the school’s computer as Gates himself and they got along immediately. Together they explored the idea of owning a computer based company one day and now Microsoft is worth more than a trillion dollars. To summarize this story using quick math, it would look something like this:

During 1968 there were more or less 303 million high school aged kids worldwide. 

Around 18 million of those lived in the States.

Around 270 000 of these lived in the state of Washington.

From these just over 100 000 lived in the Seattle region, of which 300 attended lakeside school. 

The probability went from 303 million to 300 very quickly. 

One in a million students had the luck of attending a high school that had access to one of the first time shared computers and Bill Gates was lucky enough to be one of them. 

Risk on the other hand, is just as unpredictable as luck. Gates and Allen had a friend during their high-school years called Kent Evans, who experienced the flip side of the coin called risk. Evans was equally eager to learn about the common computer in their school. Until this day Gates still classifies Evans to have been the best student in their class. He was equally experienced with computers as Gates and Allen. He was more business oriented than Allen and Gates believe that they would have all three been co-founders in Microsoft as we know it today. This could never happen because Kent passed away in a mountaineering accident during high school. The odds of being killed on a mountain in high school is around one in a million. 

Both Gates and Kent experienced one in a million chances on opposite sides of the coin, risk and luck. This theory can be applied to any form of success or failure that we encounter on a daily basis. Two things however are essential to keep in mind to make this theory more digestible: 

• Watch out who you put onto a pedestal and also who you act superior to. 

– Not all success is due to hard work and not all poverty is due to laziness. 

• Change your perspective from specific individuals to broader patterns. 

2. Never Enough

Having the scarcity mindset of “never enough” can lead to a dangerous road when it comes to finances and money. This mindset can be observed in behavioral patterns that have happened specifically with insider trading and lottery winners. We are all familiar with Bernie Madoff who was convicted for misleading investors for over 20 years and other inside traders such as Rajat Gupta who exposed internal information related to the Buffett-Goldman deal hours before it was released to the public. What is interesting about these examples is that both of these men were highly successful businessmen, millionaires. So making more money was not necessary and breaking the law in doing so was even less necessary. The question why there was a need to make more money to an extent of using illegal desperate methods is asked. Crime caused by poverty can be justified by needing basic necessities like food and housing, but this white collar crime had only one reason behind it. These men never had the sense of having enough. Enough money, enough status, enough wealth. These examples are on the extreme side, but we can see similar behavior in workaholics who neglect other parts of their identities just to reach another imaginary milestone where they think they would be satisfied if they could only have this title or this amount in salary. This scarcity mindset is constructed into our society without us even knowing about it. Here are the main reasons why:

• It is a financial skill to stop the milestone from moving forward all the time.

The fine line to keep in mind here is when the idea of having more (money, status, wealth, etc.) drives your ambition more than satisfaction does. When it feels like whenever we reach a milestone, it moves two steps forward when we have moved only one. It can cause us to feel like we are constantly chasing something and the only way to catch up is to take a bigger risk. “Modern capitalism is pro at two things: generating wealth and generating envy.” Life gets messy when we can never have enough and happiness is impossible with this state of mind. 

• Social comparison plays a big role in the scarcity mindset.

There is always going to be someone who is better at something than you are. This is a fact and the sooner we can accept that it is the same with finances and status, the better. The bar for social comparison is so high and an illusion to some extent, it can never be reached so there is no point in chasing it. It is a battle that will over and over be lost and there is no point in fighting it. We need to accept that what we have is enough, even if it is less than our neighbor. We have more than our neighbor in other aspects of our life, that is the divinity of being. Capitalism works similarly to a Los Vegas casino, your best shot is to not play the game. 

• Having “enough” is not too little.

Enough looks different for each one of us, but enough is never too little. It simply means that you have come to terms with the fact that recklessly chasing the illusion of more only leads to regret. We know when we have eaten enough and cannot stuff our stomachs any fuller, so why don’t we lead with this same thinking in finances and investment? Never reaching the point of enough can look like burnouts or risky investments that cannot be attained. In the bigger picture never reaching the point of enough can turn people into Madoffs and Guptas. 

• Certain things are not worth risking, no matter what the possible gain looks like. 

There are a few priceless things in our life: reputation, freedom, independence, family, friends, being loved and happiness. The best way to keep these priceless things is knowing where the bar of having enough is and stopping there. 

3. Wealth is what you don’t see

Money is an ironic thing. As a previous valet driver, Housel explains his observations of the “so-called” rich in Los Angeles. He has observed multiple people who drive in fancy Ferraris and Porsches one week only to discover the next week that these cars had a time limit that came with paying off loans and debts. People will do anything to buy their status up the illusionary social ladder. No shame and guilt to anybody driving a 100 000 dollar Porsche, but it is up to us to not make any pre judgements about this person. You do not know anything about their wealth. You simply just know that they have a 100 000 dollar Porsche and that is it. We cannot use appearances to make justified assumptions about people´s wealth when we are living in a time where it is so easy to fake it. Wealth is not so much about materialistic possessions as it is about unseen financial assets. Many people express the want to be a millionaire, when that simply translates to wanting to spend a million dollars. Being a millionaire is the literal opposite of spending all your money. Bill Mann, a successful investor once said: “ There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don´t have. It’s really that simple.” It is essential to differentiate between wealthy and rich. 

Rich is immediate income, people with nice cars and homes are surely rich, because in order for them to afford loans they need a certain amount of immediate income to pay off the monthly expenses. Rich people are everywhere and they are quite easy to see. 

Wealth is under the surface. It is income saved. It is a growing opportunity. It is valuable in terms of freedom of choice, flexibility and growth to buy bigger things later on. Of course there are wealthy people who spend money on big houses and fancy cars, but we are still just observing their richness, not their wealth. Wealth is unseen.

Being rich is similar to having the mindset of “I worked out, now I deserve to treat myself with candy.” Wealth has the mindset of working out, saying no to that candy and burning the needed calories over the long term for successful results. 

There are many more stories similar to these that Morgan Housel writes about and each one teaches us valuable lessons about how psychology affects money and finances and how we can expand our minds to broader patterns to figure out our own sense of financial management. In this day of age where we are overloaded with information in general, knowing how we as humans are designed to behave around money can put us 10 miles ahead in the game of life and lead to a life filled with freedom and security.

“Controlling your time is the highest dividend money pays.”

― Morgan Housel

References:

Housel, M. The Psychology of money. 2020. Read on 5.1.2023. 

Rosser, C. The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel.  2022. Read on 4.6.2023.

https://calvinrosser.com/notes/psychology-of-money-morgan-housel/