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OUR MONEY DECISIONS usually aren’t driven by rational thinking and financial math. That’s one of Morgan Housel’s key messages in his recent book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. He uses history and personal tales to highlight a crucial insight into our relationship with money—that we often feel as though we’ll never have enough.
The book contains no formulas for success, no get-rich-quick stock tips. Housel states the premise this way: “Doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.”
It didn’t take long for me to become engrossed in his theories about investment behavior. I guess we all like to read about what makes us tick. There’s plenty of that in this book. But there’s also a lot about why we make bad money decisions—even when we ought to know better.
What makes this book readable are the stories and interesting tidbits that Housel uses to support his observations. For example, there’s a comparison between Bill Gates and his close friend, someone we haven’t heard of before. Why did Gates become incredibly successful and his close friend didn’t? It isn’t for reasons that might jump to mind: genius, ambition, confidence, hard work. No, Housel attributes the difference to luck or, in this case, bad luck. And not on Gates’s part.
Ultimately, the author feels the reward for financial success is freedom. “The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today’,” writes Housel. “The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.”
I think it’s understandable to assume that taking your emotional responses into account isn’t “rational”. I would counter that it’s highly rational. In the end, our emotional responses to the roles we play (spouse, friend, employee/employer, etc), to our surroundings, and to the activities we participate in, are all important to our overall life satisfaction (which is a little different than happiness, but close enough for this post.)
Perhaps it would be better to think of optimizing one’s total life satisfaction (of which our financial life is a part) rather than optimizing one’s net worth. I think that is the most rational decision of all.
Great Book. As Dave Ramsey says “Money is 90% behavior and 10% Math”