Book Review: The Psychology of Money

Book review by Ray Hoger | Member, ARTA Pension & Financial Wellness Committee

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness

by Morgan Housel, Harriman House, 2020.

“The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behaviour is hard to teach, even to really smart people.” Morgan Housel introduces his book with this quote and demonstrates it endlessly throughout its twenty chapters. Housel is a former financial columnist for The Wall Street Journal and contributor to the investment advice website Motley Fool. He is considered an expert on behavioural finance. Although this book is by an American author with American financial products (e.g., 401K versus our RRSP, Internal Revenue Service versus Canada Revenue Agency), the behavioural analysis and advice is international in scope (with over 500,000 copies sold in over twenty-five different languages).

“Money is everywhere, it affects all of us and confuses most of us.” Housel tries to clear up some of the confusion and provides endless examples using facts, research, and stories of people whose names may ring a bell, including Cornelius Vanderbilt, John D. Rockefeller, Bernie Madoff, Bill Gates, and Warren Buffett.

Despite Housel’s assertion that money confuses most of us, he has the ability to take this difficult, seemingly incomprehensible topic and present it in a clear, easy-to-understand fashion. He begins by pointing out that our view of money is dictated by what we have experienced in our own personal view of the world, particularly early in our adult life. Did we grow up with poverty, high inflation, or suffer through a recession or depression?

The first seven chapters discuss ideas of luck versus risk, striving to have more and more, getting wealthy versus staying wealthy, how we define wealth, and deciding how we control our time. We are treated to a smooth narrative which seamlessly weaves facts, figures, and names from history with a dash of psychology that will leave you thinking, “Well of course, that makes perfect sense!”

“Wealth is What You Don’t See” is the title of Chapter 9. This and several following chapters deal with not spending to show your wealth. Housel explains the significant difference between being rich and being wealthy, and why wealth should be the goal but is also so hard to see. Our egos can often lead us to make less than optimal choices about how much, where, and when we choose to spend our financial resources.

Housel looks at history and how it is sometimes used to predict future events. The chapter titled “Surprise!” explains why this is not the case for financial decision making. Following chapters detail suggestions on how to think about and plan for our financial futures. From planning with the idea of “room for error” (estimate lower revenues and higher expenses) to changing personal goals over time, we are presented with ideas and suggestions to help deal with all kinds of present and future challenges.

Housel concludes with a final chapter titled “Confessions.” His stated financial goal is one I know I have and, I believe, one that many of us have: independence. The ability to do what we want, when we want, on our own terms. Housel paints a broad-stroked history of his financial journey and discoveries over the years. From stockpicker in his early 20s to low-cost index funds today, he details some of the lessons he’s learned:

  • Live comfortably below what your family can afford.
  • Don’t worry about keeping up with the proverbial Joneses.
  • Stop moving the goalposts further down the field.

This book is an easy, enjoyable read. Prepare to challenge any preconceptions you might have about your financial choices and what you know (or think you know) about money!