Of money and good character

In the fast-paced and increasingly technocratic modern world, we have a heavy bias towards intelligence and expertise. Tech gurus like Steve Jobs, Bill Gates, and Elon Musk, captivate our imaginations with their brilliance and vision. But there is a great deal more to success than mere intelligence. People waste their natural talents all the time. In the Psychology of Money, Morgan Housel argues that the key to financial success is not technical knowledge or genius, but good behavior and humility.

In the first chapter of the book, as a prelude to the main theme, Housel contrasts the stories of Ronald James Read and Richard Fuscone. The former was a thrifty janitor who saved every penny and left $8 million to charity at the end of his life. Fuscone, on the other hand, received a stellar education in finance at Harvard and the University of Chicago. He rose to become a VP at Merrill Lynch. His education and work experience ended up mattering very little. Fuscone squandered his money through reckless spending and a lavish lifestyle.

People often discount the impact of luck and historical happenstance on success. In the 60s, a young Bill Gates just happened to go to one of the only high schools in the entire country that had a computer. He has attributed his extremely successful career to that single stroke of good fortune as much as anything. Life and financial markets are simply too full of uncertainty and sudden revolutions, crashes, and crazes to be able to navigate via pure reason. There is a knowledge problem.

What kind of behavior, then, does Housel recommend? The ethos of the book is actually not focused on financial decisions per se. The difference between the Bernie Madoffs and the Ronald James Reads of the world is a lot deeper than how they chose to invest. It’s a matter of character. Good financial outcomes rest in frugality, patience, and humility. Reckless or rapacious types are unlikely to save and allow compounding interest to work its magic. They are also unlikely to have the courage and confidence to wait out inevitable crashes in the market.

Good and bad behavior manifests itself in other ways as well. People often think of financial success or wealth in terms of personal status or the possession of luxury goods. Housel has a much more sophisticated view. In his understanding, wealth is a measure of your ability to have freedom over time. You can be rich without being a millionaire, if you are satisfied with less than millions. Society encourages behavior that forces a misguided vision of success, that actually harms peoples ability to make responsible financial decisions.

For example, most people don’t drop $100,000 on a new sports car out of necessity. Nor do they do so because they actually enjoy driving expensive cars that much more. Such lavish and unnecessary spending most often fuels an individuals desire to appear successful and high status. Housel wryly observes that spending a million dollars does not make you a millionaire. It does precisely the opposite.

One potential drawback of the book is that it is a bit low on practical, actionable advice. If you are looking to gain precise, technical insights on how to manage your bank account or beat the stock market, look elsewhere. That is not the point of this book. Housel emphasizes behavior and character, putting his trust almost entirely in compounding interest and playing the long game.

Overall, The Psychology of Money has all the makings of a classic. The writing is clear, the insights deep. Housel has a way of framing personal finance from a fresh perspective. These observations only scratch the surface of the insights from what is a truly profound book.

The Psychology of Money is available for purchase here.

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