Book Review: The Psychology of Money

Recently I decided after a long time to read “The Psychology of Money” by Morgan Housel.

The main reason that I decided to read this book was a constant recommendation from successful “indie-hacker” entrepreneurs, so I decided to give it a try.

As I constantly try to build products that will help me advance in my goal for financial independence, I thought that this book could give me some valuable insights.

My latest endeavor is a tool that helps you remote pair program better with your teammate, making Slack Huddle screen-sharing feel like a dial-up.

My 2 cents, before going further, is that if you are just starting out building products and you are committed to ship something soon that will get you some $$, feel free to postpone reading this book. A higher priority in my list personally would be to learn how to generate more revenue through my products or even my job, and then learn how to invest it appropriately and save.

The TL;DR version

Below is a Too long; didn't read version of the book, with the main takeaways I got from it.

1. We should invest even small amounts, because of compounding, and be frugal

2. Our financial decisions are biased by our experiences

3. We are irrational beings, and that’s OK. Do not make the assumptions that as in physics we will take the path of least resistance

4. Investing has a social component, and it’s the best if we acknowledge it, so we can mitigate it

5. People enjoy to hear that things are “going to hell”. The same applies to everything around stock markets

6. We are wired to be pessimistic, from an evolutionary perspective (survival). When the market is going down, a deep breath instead of panicking is the best course of action

7. The first rule of compounding is to never interrupt it unnecessarily 🚨

What I liked

I’ve read a lot of books about money, investing, and finance, but this one is different.

Morgan Housel is a very good writer, and he has a way of explaining complex topics in a way that is easy to understand, with rich examples.

Some things that I have observed in real life, but also validated by Morgan is based on the following quotes:

Ordinary folks with no financial education can be wealthy … they have a handful of behavioral skills that have nothing to do with formal measures of intelligence. … that financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.

This is true, and makes me think that many families I know ended up being wealthy with constant painful accumulation of wealth, bit by bit, without having fancy jobs, paying them thousands of dollars per month.

Turns out that being frugal can compound more than we think, if our time horizon is long enough.

When I try personally to explain to my friends or relatives how compounding on really minor investments per month in ETFs can lead to a very nice retirement fund, they don’t believe me, so I resort to showing them the numbers by going to a compound interest calculator.

Experiences when growing up shaped our financial decisions (unconsciously)

Another topic that was fairly new to me, was the bias of our experiences. This is an interesting perspective that I never thought about before, although I know it exists in other aspects of life.

Here’s the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons. Everyone has their own unique experience with how the world works. And what you’ve experienced is more compelling than what you learn second-hand. … If you grew up when inflation was high, you invested less of your money in bonds later in life compared to those who grew up when inflation was low. If you happened to grow up when the stock market was strong, you invested more of your money in stocks later in life compared to those who grew up when stocks were weak. …
Local stock markets in Germany and Japan were wiped out during World War II. Entire regions were bombed out. At the end of the war German farms only produced enough food to provide the country’s citizens with 1,000 calories a day. Compare that to the U.S., where the stock market more than doubled from 1941 through the end of 1945, and the economy was the strongest it had been in almost two decades. …
Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.

In Greece, we have a saying called "κατοχικό σύνδρομο", which means “the syndrome of the occupation”, and it affected people that were born just before 1940, when Greece was occupied by the Axis Powers. Those people experienced heavy inflation, and lack of basic goods, and they were forced to be very frugal. This resulted in grandparents forcing you to eat way more than expected, thinking that times may be hard again.

Work never ends

This piece is what struck me the most. That our work, especially people in the “tech” economy, will never end, until we become financially independent.

More of us have jobs that look closer to Rockefeller than a typical 1950s manufacturing worker, which means our days don’t end when we clock out and leave the factory. We’re constantly working in our heads, which means it feels like work never ends ….
Controlling your time is the highest dividend money pays.

The above quote cannot be truer. I caught myself many times working on my side projects, and even when I’m on vacation, I’m still thinking about work, not directly but ideas around new architectures I could try out, new features that I would love to build and much more.

Conclusion

There are many quotes that I could have added to the list, but I think that the ones above are the most important.

It’s an amazing book, and I highly recommend it.