The Psychology of Money
When the reasonable decision is not the rational one
This article is part of a new series in which I review timely, relevant (and typically non-fiction) books that help to inform my own thinking as well as the themes I explore weekly in Intentional Wisdom.
The decision I made was not the right one. Well, economically anyhow. The year was 2003. I was a fresh-faced financier logging long hours on the Manhattan trading floor of Lehman Brothers. I was lucky to be living in what I perceived to be "the center of the universe" and earning enough to avoid starving while doing so. While I enjoyed the fast pace of both my career and NYC-based 20-something social life, I couldn't quite shake the feeling that I was stuck—physically, that is.
If you've ever lived in NYC, you'll know that car ownership is quite the cost-prohibitive endeavor. As such, most New Yorkers tend to avoid it completely. Why own a car when 95% of what you'll ever need is a short taxi, subway (or for the kids these days, Uber) ride away? And on the off chance you need to leave the center of the universe—for a vacation, a trip back home to see the folks, or a global pandemic—that's what they made airplanes and the Metro-North for.
Of course, I knew all of this already (minus the pandemic part) and I had run the numbers. Owning a car did not make sense. I could fly or ride the train or rent cars much more economically on those rare weekends that I'd actually need to leave the city, and save a ton of money in doing so.
So naturally, I bought a car. That's right. I got myself a beauty of a 2001 VW Jetta—lightly used, with about 5000 miles on it if memory serves me correctly. It was a teal-ish green, tan leather interior, loaded with all the options, and... it was fast. My god, there was some fine German engineering in that vehicle. Now, I didn't (and don't) consider myself a "car guy" by any means—and my friends tended to agree, remarking not irregularly that only 16-year-old girls and Greg Campion owned Jettas—but I didn't care, when I stepped on the gas, it was like getting shot out of a cannon. So much fun.
It was the perfect getaway car. My escape from the city. February ski trips to Vermont. Three-day summer weekends in Montauk. It didn't matter the specifics. I had freedom. That's what I was buying.
And yet, by almost any measure, buying that car was a terrible financial decision. Do you know that I paid $400/month to park that fine piece of machinery? Yep, that's right. It cost me about twice as much to park the car as it did to own it. What a horrible decision, right?
Well, I don’t know. The freedom that car bought me was priceless. And looking back, nearly twenty years later, if I had to do it over, I wouldn't hesitate for a minute to buy that sweet specimen of an automobile all over again.
What we do with our money is very much a personal decision, unique to each and every one of us. We like to think all of those economic decisions that we make are black and white—there's the right financial decision and there's the wrong one. But it's not that simple.
Enter Morgan Housel and The Psychology of Money
This is where Morgan Housel comes in. If you don't know Housel, he's a bright and rising star in the world of finance. A partner at the investment firm, Collaborative Fund, Housel has become well-known for his thoughtful long-form essays on topics ranging from history and psychology, to mental models and investing. He is one of the most recognizable personalities on "FinTwit" or Finance Twitter, where he boasts some 210k followers.
In his recently published book, The Psychology of Money, Housel deftly illustrates our complicated relationship with money—helping to shed light on why we make some of the crazy financial decisions we do, like paying more to park a VW Jetta than to own one. He has a talent for taking what some may consider a mundane topic—finance—and transforming it into a page-turner through historical examples, personal anecdotes, and well-researched stats. As a writer, I admire his work greatly.
As an investor, a saver, and a husband and father attempting to manage my own finances, I also find tremendous value in his work.
All of the ideas covered in The Psychology of Money fit broadly under the umbrella of wealth creation. And the point of creating wealth, in Housel's eyes, is to achieve freedom. He states "The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” Hard to argue with that.
Right from the get-go, in a first chapter titled "No One's Crazy," Housel explains why context is so important: "Your personal experiences with money make up maybe 0.000000001% of what's happened in the world, but maybe 80% of how you think the world works." So basically where we are from, what era we grew up in and who our parents are massively shape our view of money and therefore the actions that we take. Housel explains that while it appears many people make "crazy" decisions all the time when it comes to money, in fact, in their unique circumstances, those decisions may make all the sense in the world.
That said, there are still some crazy decisions that get made, and it's often by the people who you'd least expect it from: the wealthiest of the wealthy. In Chapter 3 "Never Enough," Housel explains the psychology behind well-known cases of greed gone wrong—from Bernie Madoff to Rajat Gupta, and what we can learn ourselves from the career-ending mistakes made by these top 0.01 percenters. "There is no reason to risk what you have and need for what you don’t have and don’t need," Housel advises, while also showing example after example of those who have fallen into this exact trap again and again.
The eighth wonder of the world
Of course, no book on finance would be complete without a discussion of what Albert Einstein purportedly called the eighth wonder of the world, compounding, which I also wrote about here. A concept the human mind still has trouble comprehending, Housel uses vivid examples to show the almost unfathomable power of incremental change over long periods of time. He masterfully evokes images of Earth's ice ages, Warren Buffet's fortune, and the exponential growth in computer memory storage to prove his point. It all serves as an incredible reminder of the power of time when it comes to growing anything, whether it is money, which is Housel's focus, or even the gains that we can make in other parts of our lives from our careers to our fitness.
Housel states: “The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own." Stay. In. The. Game. You may remember me noting in a recent article titled This is not financial advice that I only look at my personal portfolio a few times per year. This is exactly why. Short-term movements are almost meaningless. And unnecessarily interrupting the phenomenon that is compounding is the cardinal sin of investing. You don’t want to do it.
"Wealth is what you don't see"
The concept that may have resonated most with me from The Psychology of Money is the distinction Housel makes between being "rich" and being "wealthy,” which he describes almost as opposites. He asserts that “rich” is basically what you see—it’s the big house, or the fancy watch, or the luxury car. “But wealth is hidden,” says Housel. “It's income not spent. Wealth is an option not yet taken to buy something later."
The conundrum—and even the confusion between the two—stems from the fact that wealth is something we don’t actually see. It’s the car or house that wasn’t purchased or the investment portfolio that continues to grow uninterrupted. He notes that “... it is so ingrained in us that to have money is to spend money that we don't see the restraint it takes to actually be wealthy."
He recommends a variety of actions to increase wealth over time—the most powerful of which is to allow yourself the longest amount of time possible to grow your assets. But for those without the luxury of time, or for anyone else for that matter, Housel notes that mindset is almost as important “one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility."
Optimism wins in the end
Finally, I have to give a nod to Housel's Chapter 17 “The Seduction of Pessimism.” One of the things I hope you get weekly from this newsletter is a sense of optimism. I am a firm believer that the world—and more specifically the human condition—is getting better at an accelerating pace over the long term. It can be easy to lose sight of this in a sea of heated political rhetoric and alarmist headlines. But it’s true. More on this from me in the near future.
Along these lines, Housel points out that we are naturally more receptive to pessimistic views, especially in finance. He states "growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant." He goes on to show that investments like stocks, over the very long term, have consistently performed well—against all odds given an almost unbelievable sequence of disastrous events from world wars, to global pandemics to hoards of company failures. History—and historical returns—have proven that being an optimist pays off long-term. Housel’s illustrations of this point serve as a welcome reminder.
There are many other concepts eloquently asserted in this short book that this review will do no justice to, including how "tail" or low-probability events drive almost all significant returns over the long run, and how your savings rate may be more important than your income or even your investment returns. But ultimately, Housel succeeds in showing us that there is much more to wealth creation than the black and white of spreadsheets. There are biases, there are hopes and fears, and unique personal circumstances that drive our financial decisions along the way.
The Psychology of Money helps to provide us with some much-needed context on how we might consider thinking about these decisions. The ideas presented in the book serve as a helpful roadmap for getting the most out of our money in a logical and strategic way. I’d recommend it to all of my readers.
As for that Jetta, well, I don’t own it anymore. I just have the photos, the memories, and the sense that it was money well spent—psychologically, if not economically.
And that’s it for this week. I actually have to run. I’m getting some unnecessarily large tires put on my Jeep Wrangler today, and I think I just heard them call my name. Have to go pay the bill.
Have a great week. - Greg