The Psychology of Money Book Review: Three Lessons for Investors

Key Takeaways

• Morgan Housel’s book The Psychology of Money shares actionable lessons about behavioral finance that investors can leverage to manage and build their wealth.
• Pinpoint your behavioral tendencies in financial decision making and consider working with a financial advisor to help weed them out.
• Look to craft a reasonable, rather than a rational, financial plan that you’ll stick to. Don’t take financial cues from those with different time horizons and goals. 
• Structure your financial plan to achieve your ideal life rather than targeting arbitrary strategies or numbers.

Most people think managing wealth boils down to numbers and strategies. On the contrary, as Morgan Housel illuminates in The Psychology of Money, accumulating wealth is largely behavioral. Through nineteen short stories, Housel reveals the biases that commonly inflict our financial decision making.

While the book offers timeless lessons for any investor, there are a few that are particularly relevant for high-net-worth individuals and families who are looking to manage and build their wealth. We summarize three of them below.

1. Avoid Emotional Investing

Housel posits that in the realm of money, behavior often trumps intellect. Success with finances is less about applying technical knowledge and more about mastering our biases. 

Our ego and pride can cloud our judgment, making straightforward decisions about money more complex. We fall into emotional traps — panic selling during downturns and overinvesting in bull markets. We make big financial decisions at the dinner table with our spouse and over drinks with a colleague – not in pristine spreadsheets as we might believe.

Our CIO Scott Welch wrote about this topic extensively in The Five Common Pitfalls of Wealthy Families. Having worked closely with wealthy families for over two decades, he’s commonly witnessed them fall into behavioral tendencies that drive irrational investment decisions and ultimately, suboptimal financial outcomes. 

Housel advises investors to develop awareness of their tendencies in order to change them. Investors may also consider working with an unbiased, “emotionally detached” advisor who is adept at identifying and weeding out their tendencies. As Welch explains in his article, “Good advisors will make suggestions that are valid from a quantitative asset allocation perspective but also fit comfortably within (but hopefully avoid the pitfalls of) whatever mental and emotional framework the investor has developed.”

Key Takeaway: Pinpoint the behavioral tendencies that commonly bias your financial decision making and work with a financial advisor who is adept at unearthing them.

2. Choose Reasonable over Rational

Housel advises investors to adopt a “pretty reasonable” financial strategy rather than an ultra-rational one.

What does this mean? Rather than adhering to a textbook-perfect plan that looks good on paper but is impractical, craft a reasonable one that is realistic for your unique risk tolerance, financial goals, and lifestyle. In other words, the plan you’ll stick to is the best one as staying in the game is what matters most when it comes to managing your money and accumulating wealth.

Relatedly, Housel advises investors to adopt a plan that is right for them, rather than taking financial cues from friends, colleagues, or online experts. That’s because everyone is playing a different financial game. Some investors have a 30-year time horizon while others are looking to cash out in 10 years. Rather than being persuaded by people playing a different game than you, figure out what game you’re playing. 

Key Takeaway: Craft a reasonable financial plan that makes sense for your goals and time horizon rather than following a textbook-perfect plan or generic advice.

3. Plan for the Life You Want

When we ask someone why they’re looking for a wealth advisor, their answer is rarely ever “to invest in alternatives” or “to accumulate more money.” It’s to spend more quality time with their family, be able to focus on and excel in their career, or experience the peace of mind that comes with having a dedicated expert look after their finances.

Despite this, many people structure their financial plan around arbitrary numeric goals and strategies. However, accumulating wealth should serve as a tool – not as the ultimate objective.

The best financial advisors take the time to deeply understand clients’ lives, values, and priorities. Before discussing numbers or financial strategies, they ask thoughtful questions about what truly matters: What kind of life do you want to live? What are your biggest dreams for yourself and your family? What worries keep you up at night? They also help clients define what true freedom and fulfillment look like for them. Is it waking up and choosing how you get to spend the day, every day? Is it taking vacations with your children twice a year? Is it contributing to causes that are aligned with your personal values and leave the legacy you envision? 

Furthermore, this process isn’t static — it evolves. As Housel reminds us, your goals and desires will undoubtedly change over time. A good advisor will regularly revisit them and adjust your financial strategy accordingly.

A strong financial plan ensures your money is working in service of your ideal life, rather than the other way around.

Key Takeaway: Design a financial plan that achieves the life you want rather than arbitrary numbers or strategies.

Summary

Housel reminds us that so much of managing and building wealth is not based on numbers but on our values, fears, and dreams. In order to build a financial plan that’s sustainable, successful, and fulfilling, investors should tailor it to their tendencies, “financial game”, and ideal life.