Morgan Housel

The Psychology of Money | Morgan Housel on Infinite Loops Podcast

Check out Infinite Loops Episode Page and Show Notes

Key Takeaways

  • The psychological element of money explains it’s taboo; emotions like embarrassment and ego are involved with what people do with their money
  • Money and sports are non-violent forms of figuring out where you stand in society
  • The best value money can provide to you is the freedom to control your time and do whatever you like, this brings lasting happiness
  • As you get more successful, the goal post keeps moving, and you keep chasing it
    • The most important financial skill: Getting the goal post to stop moving
  • When choosing your life partner, it’s important they are  in sync with your expectations and style of living
  • The behavioral side of investing is the most important: learn about your emotions, your endurance and how you deal with volatility
  • Advice for fresh college graduates – Learn about 2 topics: health and money – here is why:
    • They will influence your life greatly regardless of your interest in them 

Books Mentioned

Intro

Morgan’s Upcoming Book

  • The title of the book is inspired by Charlie Munger’s famous speech The Psychology of Human Misjudgement
  • The book takes a holistic view of how we think about money, not necessarily risk or investing
    • There are many life lessons that can be learned from how people think about money, greed, relationships, and networks

Money is a Taboo Topic

  • The psychological element of money explains it’s taboo; emotions like embarrassment and ego are involved with what people do with their money
    • Additionally, money is involved with any decision you make (e.g. accepting a job offer or not, marrying someone, etc.)
  • Many activities have a visible impact (going to the gym for example), but money is hidden – you don’t see bank accounts or brokerage statements
    • So people can look up to someone’s physique, writing, creativity, etc. but not their money activities
  • Some people talk about being open on money matters, but they would never follow up with sharing their income statements
    • Besides, being full transparent about money comes with repercussions – For instance, workplace fairness
    • One exception is wealth fund managers who don’t invest personal money in the fund they manage – This is mostly a red flag

Money as a Hierarchical System

  • Historically, wars were how tribes determined their status and prestige. Money and sports are non-violent forms of figuring out where you stand in society
    • For instance, people view sports teams as their tribe – “My team”
    • Wealth is also a way of identifying where one stands in the pecking order
  • One of the reasons the mainstream media is melting down is because they are being replaced with individuals questioning their authority and instead just creating superior content
    • Their high prestige is being decimated by the Internet

But Money Can Provide False Signals

  • Getting a lot of social media engagement can be a false signal of what people would like to see more of
    • Similarly, earning more money can represent a false signal for success and happiness
  • Desiring more money is completely fine, but you have to understand what it can and can’t do for you – for example:
    • Money doesn’t buy you class or friendships
    • People will think highly of you when you are empathetic, nice, and providing value to the world – Not when you own a bigger house or a more expensive car
  • The best value money can provide to you is the freedom to control your time and do whatever you like, and this brings lasting happiness
  • Case of using a false signal of money: smart people getting into a finance career because it pays more, even though they don’t find it fulfilling 
    • These are brilliant minds that could have been curing cancer or developing products, instead they stare at spreadsheets all day
  • As you get more successful, the goal post keeps moving, and you keep chasing it
    • The most important financial skill: Getting the goal post to stop moving

Money is Subjective

  • Experiences shape how people think about and manage money, with different impact on societies
    • For instance, physical destruction in Europe during WWII could be a reason for moving towards a better social safety net, whereas Americans demanded lower taxes
    • Social security became normal after the great depression. Taking off shoes, belts, and jackets in airports became normal after 9/11
    • An interesting question is what long-standing effect will the economic impact of COVID-19 have on Americans, what will be the new normal?
  • When choosing your life partner, it’s important they are in sync with your expectations and style of living
    • Money matters are among the highest causes of divorce, especially in times of economic hardship. Partners being on the same page means less arguments
    • Couples have different ways of handling their finances – For instance, some have merged bank accounts, others have one person handling money decisions
  • For Morgan, the family house represents the top family expenditure – his reasoning
    • Working from home means it’s important to have a nicer house
    • It represents a way of avoiding debt and deriving satisfaction from the simpler things in life

Investing is Personal

  • The behavioral side of investing is the most important: learn about your emotions, your endurance and how you deal with volatility
    • Put simply: It doesn’t matter if you are the best stock picker in the world if you panic in an economic crisis
    • Find something that works uniquely for you, and make it work
  • Morgan prefers investing in indexes over active investing, for a simple reason:
    • Lower risk tolerance – Optimizing for better sleep at night rather than for maximized annual returns
    • Additionally, index funds have done well over the past 10-20 years
    • An old wall-street saying: “Sell until you sleep well at night”

Additional Notes

  • Advice for fresh college graduates – Learn about 2 topics: health and money – here is why:
    • They will influence your life greatly regardless of your interest in them
      • The biggest concepts of money are the psychological concepts
      • Additionally, learn the math and mechanics of compounding
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Notes By Mostafa Khaled

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