Most of us assume financial success depends on education and intelligence. But in The Psychology of Money, finance expert Morgan Housel presents an alternate hypothesis: The key to financial success lies in understanding human behavior. Housel posits that when you understand how emotions and beliefs influence your financial decisions, you’ll make better financial decisions.
In this guide, you’ll learn why people fail to achieve financial success and why you want money. You’ll also learn what to include in your financial strategy, how to create one you can follow for decades, how to follow it through those decades—and how to pay attention to the information you need to do so.
Money is ubiquitous—so why do so few people master it? Housel posits two major reasons: We underestimate the role of chance in financial success, and we confuse being wealthy with being rich.
Housel suggests one reason we fail to become financially successful: We underestimate the role chance plays in our financial lives. For example, we forget Bill Gates was successful not just because he was intelligent but also because he got lucky: He was (literally) one in a million teenagers who had access to a school computer in 1968. (Shortform note: In Fooled by Randomness, former trader Nassim Nicholas Taleb adds that when you succeed matters: Early success helps determine subsequent success because winning an early random advantage positions you to win subsequent random advantages. Microsoft may have succeeded partly because Gates got an early advantage through chance contracts and positive feedback.)
Housel contends our ignorance of chance is dangerous because many people try to gain wealth by imitating the most exceptionally successful people—but thanks to chance, copying what they did often doesn’t lead to success. As Housel notes, the more exceptional the story, the more likely luck played a bigger role in its outcome. So the more exceptional the story, the more unique it is and so the less likely you are to be able to learn lessons from it.
Instead, Housel recommends that you pay attention to patterns, not people. If many wealthy people did Thing A to get wealthy and only one wealthy person did Thing B, it’s more probable doing Thing A will make you wealthy. (Shortform note: Taleb warns that while you can gain moderate success by following the patterns of the wealthy, you’re unlikely to get wild success—millions of dollars and lasting fame—without luck: a positive rare event plus few negative rare events. Just because something (like a certain pattern of behavior) is necessary for wild success doesn’t mean it caused wild success.)
Housel pinpoints another reason we fail to achieve financial success: We confuse being wealthy with being rich. He explains that if you’re wealthy, you have a lot of money in the bank. In other words, wealth is money you’re not using but could use if you wanted to. But if you’re rich, your current income is high: You have money you’re able to spend on expensive items.
Crucially, Housel contends, you can tell whether someone is rich, but you can’t tell if they’re wealthy. This is because you can see how much someone spends on items, but you can’t see inside of their bank account to see the money they’re not using—in other words, their wealth. Of course, someone can be both rich and wealthy, but you can only see how rich they are.
(Shortform note: The Millionaire Next Door authors Thomas J. Stanley and William D. Danko first popularized the difference between being wealthy and being rich. They also noted that rich people can lack wealth, and that it’s hard to identify the wealthy since they save their money. But they define wealth as your net worth, which is your current assets minus your liabilities.)
Knowing the difference between being wealthy and being rich is essential because we learn by imitation, Housel argues. And knowing who to imitate—and who not to imitate—helps us protect our money.
In an ideal world, you could learn how to be wealthy by seeing the self-control wealthy people exercise. But since wealth is obtained by not spending your money, you can’t see the process. Therefore, it’s hard to learn wealth by imitation—you don’t know who to imitate. (Shortform note: Even if you don’t know who to imitate, you can discover what habits lead to wealth with the right resources—like The Millionaire Next Door, which describes the habits of the wealthy.)
But it’s easy to see and imitate people who are rich—and if you don’t understand they might not also be wealthy, you may assume being wealthy means you can spend money as you wish. But behaving this way will impoverish you. When you understand the difference between being rich and being wealthy, you avoid this trap and prevent yourself from draining your money away. (Shortform note: Stanley and Danko suggest that rich people who aren’t wealthy are imitating not other rich people but their lower-income parents, who taught them money is something to spend when you have it—not something you save to grow your wealth.)
Now that you’ve learned why people fail to achieve wealth, you can adopt the mindsets Housel believes are essential for a healthy attitude about money: Money is valuable because it buys you control over your time, and it’s possible to have enough money.
Housel contends the true value of money is as follows: Money buys you control over time, which psychologists contend is the key driver of happiness. When you have control over your time, you can choose what to do and when to do it. Feeling like we control our lives is so essential, we rebel when we don’t feel it—a phenomenon known as “reactance:” People who feel they don’t have control won’t do things they want to do just to regain that sense of control.
(Shortform note: In Influence, psychologist Robert Cialdini adds that we exhibit reactance partly because we find things with limited availability more appealing—especially if those things were previously abundant. In other words, the less control you have, the more control you want—and the more likely you’ll exhibit reactance.)
But modern-day Americans lack control over our time, so we’re not as happy as we could be. Housel explains that as more and more of us do knowledge work, we think about our jobs even at home. As such, we feel like we’re always working and don’t control our time—so we’re unhappy. (Shortform note: Some psychologists suggest we’re unhappy because we have too much—not too little—control over our lives: Modern Americans have so many options we don’t know what to choose, and this uncertainty causes anxiety.)
So how can you become happier? According to Housel, end-of-life interviews indicate that people value things they have the luxury to do because they control their time—like the ability to develop quality relationships. So having more control over your time will likely make you happier, too. (Shortform note: One way to increase your sense of control over your time—and so your happiness—is to determine how much an hour is worth to you. Use this information to evaluate whether it’s worth paying for time-saving services, like a housekeeper.)
You now know money’s valuable because it buys you control—but how much money should you have? Housel never gives an exact number—but, he warns, wanting more than necessary can drive you to lose all your money. That’s why he thinks learning to be happy with enough is critical to financial success.
Housel explains that some people are never satisfied: No matter how much money they make, they still want more. This endless pursuit of more can often drive them to risk their existing wealth for wealth they don’t have and don’t even need. (Shortform note: Other experts add that people risk their wealth due to overconfidence: Overconfidence may drive people to risk more than they should because it makes them think they’re not really risking that much.)
When you learn to be happy with enough money—whatever that is for you—you don’t take unnecessary risks with your money. (Shortform note: Mindfulness in Plain English suggests that meditating can help you destroy greed—which may prevent you from taking unnecessary risks.)
How can you learn to be happy with enough? One technique Housel recommends is to stop increasing your lifestyle standards. If you keep wanting an increasingly lavish lifestyle, you’ll never be satisfied. Not only will you then take dangerous risks to get satisfaction, you’ll grow envious of others who live whatever way they want to, which will diminish your enjoyment of life. So it’s critical that, once you reach the lifestyle you want, you decide to be happy at that lifestyle—not one that’s slightly more prestigious.
(Shortform note: Housel seems to disapprove of lifestyle inflation, which is when your everyday spending increases as your income grows. But other financial experts encourage you to enjoy increases to your income by spending on experiences: Experiences make you happier than items do, so you’ll feel more satisfied even if you spend the same money.)
Now that you understand how to think about money, we’ll discuss the three elements Housel considers essential to a financial strategy: Taking advantage of compounding, saving money, and developing a plan for when things go wrong.
Housel explains that the longer you invest, the more money you make because returns compound—that is, they build on previous returns to make ever-increasing returns. He suggests you take advantage of compounding by finding investments that return solid, consistent results over time. He argues that ultimately, this strategy will make you the most money.
He argues that due to the power of compounding, how long you invest is the most important factor determining your investment success—even more than other factors that seem intuitively important, like your annual returns. As evidence, Housel notes that Warren Buffett is 75% wealthier than investor James Simons—even though Simons’ annual returns are triple Buffett’s—because Buffett’s returns have been compounding for 40 years longer than Simon’s.
(Shortform note: Range’s David Epstein thinks it’s easier to succeed as a generalist, who’s competent in many fields, than a specialist, who masters one field. Buffett and Simon prove both can succeed: Buffet devoted his life to investing; Simons succeeded in other fields first.)
Housel contends that people often ignore the power of compounding because it’s so counterintuitive: Even if you know compounding works, it’s hard to imagine that just waiting can turn unimpressive returns into impressive numbers. As such, we try to get impressive numbers through methods that seem better—like finding the investments with the highest annual returns—even though they don’t work as well as compounding does.
(Shortform note: Why is compounding so counterintuitive? Psychologist Daniel Kahneman explains that humans are notoriously bad at questioning what evidence might be missing. So even if we logically know that how long you invest matters, we struggle to act on this information because we can’t see the numbers in our bank account 50 years from now.)
The second essential element of a successful financial strategy, according to Housel, is to prioritize saving money.
Housel considers saving essential for three main reasons. First, saving is essential to building wealth due to the nature of wealth: Since wealth is the money you don’t use, it’s the money you save—meaning you can’t build wealth without saving money. Second, saving is the most reliable way to build wealth because it’s totally in your control. Other wealth-building methods, like investing or increasing your income, are full of uncertainty. But saving isn’t: You always control how much you save, and saving will be just as effective tomorrow as it is today. Finally, saving is a comparatively easy way to build wealth: It’s much easier to save money you already have than it is to increase your income or your investment returns.
(Shortform note: Not all thought leaders distinguish between saving and investing: In The Success Principles, Jack Canfield suggests maximizing your savings by investing them. But by Housel’s definition, investing isn’t the same as saving: You can’t rely on your investments because you could lose them at any moment.)
To ensure you save money, Housel recommends, stop caring about others' opinions. Housel argues we overspend because we care too much about others’ opinions of us. Once you exceed the level of spending needed to purchase luxurious basics, he contends, you’re no longer spending for yourself: You’re now spending to prove to others how much money you have. (Shortform note: Housel recommends only spending enough to purchase luxurious basics, which are “comfortable, entertaining and enlightening.” But this is subjective, so it’s hard to tell if you’re overspending. One way to assess whether you’re spending for your ego is to define what’s “enough”—as we saw in Lesson #4—and see if you spend more than that.)
By learning to be humble and ignore others’ opinions, you’ll naturally want less. When you want less, you’ll spend less, and you’ll save more. (Shortform note: In How to Stop Worrying and Start Living, Dale Carnegie recommends several strategies for ignoring others’ opinions, like becoming your own worst critic.)
The final essential element of any financial strategy, according to Housel, is to plan for things to go wrong. Doing so protects your financial future and keeps you in the game long enough to reap the benefits of compounding.
Housel warns that people are often too optimistic with their finances, which leads them to put too much of their wealth at risk at any one time on a strategy that can be taken down by any one factor of bad luck. But the future is uncertain: You don’t know what bad luck or risks you will experience. So if your financial plan only works in a narrow range of possible futures, you’re placing yourself in a precarious position.
Planning for things to go wrong protects you: In doing so, you plan for a wide range of possible futures—and increase the likelihood you’ll become financially successful even if a lot of things don’t go your way. (Shortform note: Having broad competence in many fields, as Epstein recommends, is one way to protect yourself: You’ll survive even if your industry disappears.)
Additionally, planning for setbacks allows you to endure losses long enough to be positioned to take advantage of opportunities when they arise. When you can weather occasional losses, you’ll still be in the game to reap the occasional windfall—which can earn you significant money if you’re able to grab it. This applies to many types of investments, like the housing market: If a downturn wipes your savings out, you won’t be able to take advantage of low housing prices, which could lead to high future returns.
(Shortform note: Housel’s warning about the housing market implies that he thinks buying a house is an investment. But other financial experts warn that a house is not an investment : A house’s value depends on the economic opportunities of where it is, so if your local economic opportunities decline, your house will decline in value and may become a liability.)
How, exactly, can you plan for things to go wrong? Housel recommends the following methods:
Never put your entire fortune at risk. Instead, risk only a small portion at a time. Keep enough invested in safe investments so you can cover any losses incurred by your riskier investments. (Shortform note: In Antifragile, Taleb also warns against risking your entire fortune. But he emphasizes the extreme options over the average ones—specifically, the barbell model: Keep one end extremely safe (like in the bank), and one end high-risk and high-reward. This way, you can only ever lose the small portion of your money you’ve risked—but could earn a lot more.)
Don’t create strategies that hinge on one single factor because if that factor goes wrong, the entire strategy fails. Instead, have backup systems in place that protect you when a particular factor fails. (Shortform note: A single factor many of us base our financial lives on is our ability to keep working. But you could suffer a medical condition that prevents you from working. That’s why financial experts recommend purchasing disability insurance.)
Now that you know what to put in your financial strategy, how do you make sure it’s one you’ll stick to? Housel names two principles to keep in mind: Expect your future goals to change, and prioritize sense over logic.
To develop a long-term strategy you can follow over decades, Housel recommends, expect your future goals to change. As we’ve seen, the longer you leave your money alone, the more compound interest it can accumulate. But, he posits, people struggle to leave their money alone because they change—and since they can’t predict how they’ll change, they don’t invest their money in ways that will work for their future selves.
Housel explains that when making financial plans, most people fall victim to the end-of-history illusion, a psychological phenomenon where you recognize that you’ve changed a lot, but you don’t expect to change a lot in the future. However, you’ll probably change just as much in the future as you did in the past. (Shortform note: Why do people fall for the end-of-history illusion? The psychologists who discovered the end-of-history illusion (or the end-of-history effect) suggest that believing you don’t change is comforting: It’s terrifying to imagine a future self drastically different from your current self.)
To protect yourself from the end-of-history illusion, Housel recommends that you don’t make extreme financial plans. In other words, avoid any plan that involves extremes in your commute, savings, or personal time. (Shortform note: What counts as extreme in each area will likely depend on your age and location. So instead of comparing yourself to others not in your situation, consider avoiding the options that feel extreme to you, even if they statistically aren’t.)
Why? Housel explains, if you make an extreme financial plan, you may regret your choices. For example, your single-minded focus on your career may lead to wealth but no loved ones to share it with. (Shortform note: If you do regret an extreme financial plan, ease the pain by finding the silver lining: Learn something from the regret and apply it to your future.)
Second, Housel states, if you make an extreme financial plan and change it later, you won’t be able to take full advantage of compound returns. For example, if you think you’ll never want to settle in one place, you may take jobs that pay just enough to let you travel the world cheaply. But if you eventually want to settle down, you may not be able to retire where you want. Had you taken slightly better-paying jobs and invested that money, you would have more compound returns—but you can’t get that money now. (Shortform note: Remember that you may change your financial plan not because you want to but because you have to. If this happens, you’ll be more exposed to financial ruin if you’ve followed an extreme financial plan, which can help you achieve one goal but might leave you vulnerable to things going wrong in other areas of your finances.)
Another key to creating a long-term financial strategy you can follow for decades is to develop a strategy that’s sensible, not logical. Housel implies that most people mistakenly think they want a logical strategy (which focuses exclusively on maximizing your earnings) because that will make them the most money. But what people really want is a sensible strategy, which prioritizes your peace of mind, and that following a sensible strategy will maximize your earnings in the long run.
(Shortform note: The more complicated something is, the smarter it seems. So a sensible strategy, which prioritizes your peace of mind over complicated math, may seem too simple to work. But in a 2015 article, Housel explains you don’t need to understand the math behind why your strategy works—only its real-world consequences.)
Housel explains that following a sensible strategy will ultimately make you more money, even if it doesn’t perfectly maximize your earnings, because it accounts for the important non-financial elements logical strategies ignore—like your desire to prevent regret or the ease of following a strategy. (Shortform note: Why do we follow logical strategies that ignore such important elements? We may be overly impressed with the academic credentials of the experts who recommend them, and so follow their advice blindly.)
How does this work, exactly? As Housel repeatedly states, the longer you have money in the market, the more likely you are to increase it. So the best long-term financial strategy is to pick a strategy and commit to it long-term. Since you’re more likely to stray from a strictly logical strategy if it drives you to feel regret or if it’s unreasonably difficult to follow, a sensible strategy—which is easier to stick to—will ultimately make you more money. (Shortform note: One way to make a strategy easy to follow long-term and thus sensible is to automate your investments, as financial expert Ramit Sethi suggests in I Will Teach You to Be Rich.)
To create a sensible strategy, Housel recommends, invest in companies you love. This is illogical: How you feel about a company doesn’t affect its earning potential. But, if a company you love does poorly, you won’t abandon your investment as easily because you care about the company. By investing in companies you love, you’ll stay in the market longer, which will ultimately lead to more wealth. (Shortform note: Just don’t invest in the company you work for, experts warn: If the company fails, you’ll lose your investments and your income.)
You now know the keys to creating a financial strategy you can stick to long-term. But in an ever-fluctuating market, how do you handle the inevitable bad times? Housel shares two lessons to help you evaluate bad news appropriately: Don’t be put off by uncertainty, and remember that even if you fail frequently, you can still succeed.
Housel shares one key to reacting well to bad news: Don’t be put off by uncertainty. He argues that to achieve long-term investing success, you must accept that you’ll feel uncertainty as the market fluctuates. Otherwise, you won’t be able to endure the uncertainty long enough to let your returns compound.
Housel explains that investing inherently includes some measure of uncertainty—and the higher the potential gain, the more uncertainty you feel. For example, the longer you let your stocks compound, the more money you can gain, but the longer you have to feel the uncertainty of not knowing exactly what will happen to your money. (Shortform note: Some discomfort may be inevitable when investing, but constant discomfort isn’t. Checking your investments only once a quarter may reduce your anxiety about your investments.)
According to Housel, most people try to limit the uncertainty they experience by timing the market—but since timing the market is impossible, they end up losing money. (Shortform note: Ironically, in The Intelligent Investor, Benjamin Graham suggests that some people time the market not due to fear of uncertainty but due to overconfidence: They think that if you’re smart enough, you can predict how the market will move.)
So, Housel recommends, instead of trying to avoid uncertainty, accept it’s inevitable when investing. Remind yourself you’re trading your short-term peace of mind for potential long-term investing success—and use that to endure the market long enough to let your returns compound. (Shortform note: In his book, Housel focuses exclusively on the toll investing can take. But in the blog post he based his book on, Housel argued every financial reward takes a toll on some aspect of your life, and you can only get the reward if you accept those tolls.)
Another reason to remain optimistic in the face of bad news is that even if you fail frequently, you can still succeed.
Housel explains that nearly every successful financial venture you hear about owes its success to low-probability outlier events—luck. These events, when positive, are so powerful they compensate for a larger number of smaller setbacks a company might go through. For example, Nintendo owes its dominance in the American market to the massive success of Super Mario Bros., which did so well it made up for the losses from other products that failed in the United States. (Shortform note: Housel only discusses positive outliers, but they could be negative: A negative outlier event could drive the failure of an otherwise successful venture because it was so powerful it offset all the other successes.)
Since we only pay attention to these outlier events—and not to the failures the outlier events offset—we forget how rare outlier events are and conversely just how common failure is. As such, we overreact when failures inevitably happen to our own ventures. But when you realize how common failure is, you realize you can fail most of the time and still be successful—so you can react to your failures appropriately. (Shortform note: One area where we do pay attention to the failures offset by outliers is in careers: We often talk about how often successful people failed before achieving their (outlier) success.)
To do so, Housel recommends, pay attention not to the extent or frequency of individual failures but to the impact of your failures on your overall financial health. The outlier events in your life can offset the impact of many individual failures, Housel explains. So paying too much attention to how often you fail or the outcome of one investment paints an inaccurate picture of your financial health. Instead, pay attention to your overall financial health, since that’s what matters. (Shortform note: Instead of focusing on the negative impact of failure, consider viewing each failure as an opportunity to learn what not to do in the future.)
Sticking to a long-term financial strategy doesn’t just require you to understand the mindsets above—it also requires you to know how the information you encounter affects your decisions so you can make better decisions. One way to ensure you pay attention to the right information, according to Housel, is to know your personal financial goals.
To pay attention to the right information, Housel suggests, know what financial goals matter to you personally so you don’t get caught up chasing the goals of other people. In other words, don’t get caught up in a herd mentality and chase investment opportunities just because lots of other people are chasing them.
When you know your financial goals, Housel contends, you can ignore irrelevant information that might lead you to make poor decisions, such as basing your financial moves on others’ actions and, for example, getting caught in an investment bubble (like housing or stocks), and so you’re able to make better decisions and protect your financial health.
(Shortform note: How does modern access to unlimited information affect our experience of bubbles? Experts contend that the Internet has made bubbles more dangerous for unsuspecting investors: Bubbles are bigger and faster now, partly because investing apps have made investing easier. But the Internet has also made us better at filtering out irrelevant information—so long-term investors may be better at ignoring what short-term investors do.)
To discover your personal financial goals, Housel recommends that you write a mission statement for your finances: How long will you invest your money? What do you expect or hope will happen over that time? (Shortform note: Housel’s financial mission statement focuses on your investments. Consider writing a financial mission statement that covers goals in other areas, like spending.)
Once you discover your financial goals, Housel contends, you’ll easily ignore irrelevant information. Instead, you’ll pay attention only to information relevant to your financial goals—and as such, you’ll make better decisions as you pursue them. (Shortform note: Paying attention to too much information may worsen your decisions, no matter how relevant: In Smarter Faster Better, productivity expert Charles Duhigg posits we may grow overwhelmed by the amount of data available and stop taking it in. He recommends preventing this overwhelm by acting on the data you encounter—like by handwriting it.)
How can you become financially successful? In The Psychology of Money, finance writer Morgan Housel posits that the secret lies in understanding human behavior: When you understand the emotions and beliefs that influence your financial decisions, you make better decisions. In his book, Housel illuminates these emotions and beliefs, explaining why we make bad financial choices—and what you should do instead.
Morgan Housel is an award-winning finance writer and former finance columnist at The Motley Fool and The Wall Street Journal. He is also a partner at The Collaborative Fund, a venture capital firm specializing in technology.
Connect with Morgan Housel:
Publisher: Harriman House
Published in 2020, The Psychology of Money is Housel’s third and most popular book. It differs from his previous book because it is full of new and original insights: His first book, Everyone Believes It; Most Will Be Wrong, is a collection of previously published essays, while his second, book, 50 Years in the Making: The Great Recession and Its Aftermath, is a collection of interviews with other financial experts. That said, The Psychology of Money is based on Housel’s viral 2018 blog post with the same name.
Housel focuses on sharing timeless truths about wealth. So in some ways, The Psychology of Money acts as a synthesis of some of the best personal finance wisdom shared through the decades—from 1996’s The Millionaire Next Door to 2012’s Antifragile. But unlike other personal finance books, Housel presents almost no equations or specific strategies. Rather, he focuses on presenting the broad principles you need to understand to gain wealth.
The Psychology of Money became an international bestseller and was particularly popular in finance media, with several publications devoting articles to the lessons shared in the book. It is also set to be made into a movie: Cavalry Media purchased the screen rights in 2020.
Online reviewers who appreciate the book love the timeless, simple lessons that Housel shares. They find his teachings useful and impactful, and they love the real-life stories Housel uses to illustrate his arguments.
Online reviewers who find fault with the book find Housel’s teachings unoriginal and repetitive. They also note a lack of diversity in the real-life stories Housel describes, which almost exclusively star men.
The lessons Housel shares in The Psychology of Money mostly make intuitive sense. However, Housel’s support of these lessons is uneven. Sometimes, he backs up his claims with research and anecdotes of well-known people. Other times, he supports his ideas with only personal experience. Research shows that many of the ideas that aren’t as well-supported are already popular and well-known in the personal finance genre—but Housel often doesn’t attribute these ideas to the people who originally popularized them.
Additionally, while marketed as a collection of timeless lessons about finance, The Psychology of Money is most applicable if your financial strategy includes investing in the United States. Much of Housel’s advice involves investing in financial markets specifically—indeed, Housel doesn't seem to consider that you can create a financial strategy without doing so. Furthermore, Housel recommends many strategies based on his assumption that the US economy will continue growing long-term. So if you’re not investing in the US, his strategies may not work as well for you.
Housel devotes the first 18 chapters of his book to teaching 18 lessons he thinks you must understand in order to achieve financial success. Each of these chapters contains a paragraph at the end connecting its ideas to the immediately following chapter—but otherwise, the chapters do not seem to be grouped in a meaningful way. After sharing his lessons, Housel presents a synthesis of his ideas in Chapter 19 before describing how he manages his own wealth in Chapter 20. Finally, Housel shares an epilogue where he briefly describes American economic history in an attempt to explain why modern-day Americans think about money how they do.
In this guide, we’ve focused on making Housel’s lessons easy to follow. To that end, we’ve re-ordered his lessons: We’ll first describe the mindsets you need to achieve financial success before diving into how to create and follow a good financial strategy. We’ve also eliminated many of Housel’s anecdotes for clarity, as well as Housel’s description of how he manages his own money, since it only applies to him.
Given that Housel focuses mostly on broad principles, we’ve supplemented many of his ideas with concrete recommendations from other finance experts. We’ve also noted how Housel’s ideas have changed over the years by drawing upon his previously published works—including the original blog post he based this book on.
In The Psychology of Money, author Morgan Housel argues that when it comes to money, understanding human behavior is more important than understanding the mathematical details. According to Housel, most people assume that money follows a set of laws, the way physics or math does: If you understand the laws, you understand how money works and can achieve financial success. Therefore, people assume that financial success depends on education and intelligence.
However, Housel argues, neither math, intelligence, nor a knowledge of how markets work guarantees financial success. Rather, he contends, the key to financial success lies in understanding why humans behave the way we do. For example, if we all know that we should save 10% of our incomes, why do so few of us do it? When you understand not just the math but also the emotions and beliefs that influence your financial decisions, you can learn how to make better financial decisions.
Housel, a finance expert and former Wall Street Journal columnist, came to this conclusion shortly after the 2008 financial crisis. If money were as logical as people assumed, experts would have agreed on why the 2008 financial crisis happened. But Housel found that experts had competing theories and solutions—all of which were equally possible. Housel argues that the fact that several highly trained experts could all come up with equally plausible but competing theories about the 2008 crisis means that prior knowledge about finance doesn’t guarantee financial success.
Why Experts Don’t Agree
Housel seems to think that the fact that highly trained experts don’t agree on a single explanation is unique to finance. But there are several fields where experts disagree; for example, historians often present competing but equally plausible theories about why major events happened.
There is, however, a commonality between history and finance that may explain why experts disagree in both fields: Understanding both finance and history requires an intimate understanding of human behavior. As Housel notes, you can only understand finance if you understand how people’s emotions and beliefs influence their financial decisions; similarly, you can only understand history if you know why, generally, people made the choices that they did.
However, since human behavior is only predictable to a certain degree, there can be several different explanations of the same phenomenon that all make sense in both fields.
We’ve divided Housel’s discussions into seven parts:
Money is everywhere and touches almost every part of everyone’s life. So why do so few people succeed in mastering it? In this section, we’ll learn why so many people struggle to manage their money well. We’ll discuss why people follow so many different rules when it comes to money and how that can hamper your financial success. We’ll then explore three additional reasons people struggle to achieve financial success: We underestimate the role of chance in financial success, we look to the past to predict the future, and we confuse being wealthy with being rich.
In a world that largely assumes that money acts on mathematical principles, why do so many people act in so many different ways when it comes to money? In Chapter 1, Housel argues that it’s because everybody acts in ways that feel rational to them—but what seems rational to you isn’t rational to me.
Housel argues that people develop drastically different ideas about what’s rational because our personal experiences with money define how we approach it in life, but we all have vastly different economic experiences, so we all approach money differently.
Housel argues that it’s not what you learn but what you live through that most affects your relationship to money. We create mental models of the financial world based on what we experience, and we act accordingly. Housel attributes this to the fact that real-life experiences leave an emotional impact that is impossible to replicate. In particular, Housel notes that while you can learn a lot of financial information from external sources, like textbooks, you cannot truly experience the anxiety of a particular financial situation unless you have lived through it.
(Shortform note: If what you live through most affects your relationship to money because of the emotional impact personal experience has, can fictional sources—like a novel—recreate the emotional impact of a particular financial situation? It’s possible: Reading about something a character does stimulates the regions in your brain that control that action, so you might feel what the character feels, too.)
Housel contends that people base their decisions mostly on the financial climate in their early adulthood, instead of on their goals or the specific features of investments available to them. He specifies three financial areas in which your personal experience—and thus your views—might consequently drastically differ from others:
(Shortform note: Housel’s argument that people base their decisions mostly on the financial climate in their early adulthood comes from a study that argued the same. However, the study shares an important caveat that Housel fails to include: While the financial climate in your early adult life remains influential decades later, you place the most weight on your most recent returns when making an investment decision. In other words, your early adulthood experiences affect your financial decisions today—so your experiences of stocks, inflation, and unemployment may affect your financial decisions today—but they don’t determine them.)
Since your personal experience with money differs drastically from others’, Housel contends, you operate on different financial information and have different values than everybody else. Therefore, behavior that seems irrational to you seems rational to other people.
For example, 1970-born Rick might view stocks as a surefire money maker because they increased greatly in his early adulthood. As such, he might invest heavily in them. But 1950-born Pam might view stocks as an unstable investment given how little they moved in her early adulthood—and instead hold mostly cash. Rick and Pam both view the other’s strategy as irrational—but each strategy is rational within the mental model each person holds.
(Shortform note: The assumption that other people behave the way you do—when they don’t—is not limited to finance but is, in fact, a psychological phenomenon known as the false-consensus effect, which holds that we’re prone to believing that others agree with beliefs that we deem important or probably correct—and most of us think that our financial beliefs are both important and probably correct.)
In Chapter 2, Housel argues that another reason we fail to become financially successful is that we underestimate the role that chance plays in our financial lives.
To illustrate how powerful chance can be to our financial success, Housel describes the story of Bill Gates. Bill Gates achieved his success partly because he was smart and successful. However, Housel argues, it was also because Bill Gates was (literally) one in a million teenagers who had access to a school computer in 1968. Gates himself attributes his computer success to this fact. Kent Evans was a good friend of Gates’ who was similarly adept at computers. However, Evans passed away in a mountaineering accident. The odds of this were also one in a million. Both of these teenagers could have founded Microsoft. The only reason Evans didn’t is due to chance. Similarly, chance plays a large role in all our financial lives.
(Shortform note: In Fooled by Randomness, former trader Nassim Nicholas Taleb adds that it’s not just whether you get lucky that plays a role in your financial success but how early you get lucky—as shown by Gates’ success. In the real world, Taleb argues, early success helps determine subsequent success because if you win an early random advantage, you’re better placed to win subsequent random advantages. He suggests that Microsoft succeeded not because it was the best software available but because Gates got an early advantage through chance contracts and positive feedback.)
Housel argues that we ignore the role chance plays in our financial lives for two main reasons:
#1: We don’t understand chance.
We all know that chance plays a major role in our lives—and, as Housel notes, it’s technically possible to statistically analyze the relative risk of most decisions. However, most of us don’t do this because it’s too hard. Even if we did, there’s no way to know exactly how big a role chance plays in our lives. Since explaining the role of chance is difficult and in some ways impossible, we don’t talk about it.
(Shortform note: Our lack of understanding about chance leads most laypeople to treat luck as something practically paranormal and totally out of our control: You either get lucky or you don’t. However, Luck Factor suggests that you can increase how lucky you are through several techniques like listening to your instincts.)
#2: We misattribute the role of chance.
We generally attribute others’ failures to poor decisions instead of to chance: Since we don’t know how they thought, we default to the simple story that their thought process was somehow wrong. But we generally attribute our own failures to bad luck: We know what went through our mind, so it’s easier to devise complicated explanations for our failures that involve outside forces—like bad luck.
(Shortform note: Our tendency to blame other people’s shortcomings on their personality but our own failures on our circumstances is an example of a psychological concept known as fundamental attribution error. It’s often decried by thought leaders, like Mark Manson in The Subtle Art of Not Giving A F*ck, where he warns against the urge to blame your situation for your problems, arguing that only you can be responsible for your issues because you control how you react to and frame any situation.)
Housel contends that our ignorance of chance is particularly dangerous because many people try to gain wealth by imitating individual financial success stories—but thanks to chance, copying what they did often doesn’t lead to success. Housel argues that many of us try to learn what and what not to do with money by studying the most exceptional financial success stories—like the Bill Gateses of the world. However, Housel argues, the more exceptional the story, the more likely it is that luck played a bigger role in its outcome. Therefore, the more exceptional the story, the more unique it is and thus the less likely you are to be able to learn lessons from it.
So, Housel recommends instead, pay attention to patterns, not people. As Housel notes, if many wealthy people did Thing A instead of Thing B, it’s more probable that doing Thing A will make you wealthy. However, if only one person did Thing B and still got wealthy, it’s more likely that chance played a larger role in her success—and doing Thing B is less likely to make you wealthy.
Why Paying Attention to Patterns Won’t Make You Bill Gates
In Fooled by Randomness, Taleb warns that although you can achieve moderate success by following the patterns of wealthy people, you’re unlikely to achieve wild success—the kind with millions of dollars and lasting fame—without luck: a positive rare event plus a lack of negative rare events. Taleb notes that wildly successful people might all exhibit patterns of behavior, like a willingness to work hard and take risks, but that doesn’t mean every hardworking risk-taker is a millionaire. Just because a skill or a pattern of behavior is necessary for wild success doesn’t mean that it caused wild success.
To create a successful investment strategy, you must predict what the markets will do decades from now. Most people base these predictions on past events—but doing this, Housel argues in Chapter 12, is one reason so many people fail financially. He contends that you can’t rely on history to predict the future for two main reasons.
#1: History is a series of unpredictable events, and the future will also be a series of unpredictable events, which means you won’t be able to predict the outlier events that make the most difference.
Housel argues that events make history precisely because they’re unpredictable: In other words, history is itself a record of unpredictable events. Similarly, the future will also be unpredictable: Just as the past has continuously surprised us, so too will the future continue to surprise us.
He then argues that the biggest events we can’t predict—the outliers—will set off unpredictable chain reactions that will have the biggest impact on our economic futures. But since studying history can’t help you predict the outlier events—or their second- and third-order effects—it’s not as useful as we want it to believe.
To illustrate, Housel describes how the terrorist attacks of September 11, 2001, led to today’s student loan crisis. After the attacks, the Federal Reserve cut interest rates to shore up the wobbling economy that resulted. This worked initially: Americans took advantage of low interest rates and borrowed money. But they took on more than they could afford, which led to a credit bubble that popped in 2007. Thanks to the ensuing recession, people who couldn’t find jobs decided to get a college degree, which Housel argues led to the current crisis where people hold $1.6 trillion dollars of student debt and default 10.8% of the time. As Housel notes, it would be practically impossible to predict the student loan crisis as a result of the September 11 attacks—but that’s exactly what happened, and most of history follows similarly unpredictable patterns.
(Shortform note: One reason predicting the impact of outlier events is so difficult is because so many other factors also influence the events’ impact. As one article points out, had the Federal Reserve limited borrowing, their change in interest rates wouldn’t have driven a credit bubble—so there may never have been a recession that triggered a student loan crisis.)
Why We Keep Using History to Predict the Future
Why do we continue to insist that history can help us predict the future? After all, we’ve been making predictions for thousands of years. So presumably, many people other than Housel have realized by now that it’s impossible to predict the events that make history—or the consequences of the outlier events.
One possibility is that not knowing what will happen in the future terrifies us; and, as we’ll learn in Lesson #18, telling a story about what will—even if it doesn't come true—comforts us by giving us a sense of control.
Alternatively, we may all suffer from a psychological phenomenon known as the hindsight bias. In Thinking, Fast and Slow, psychologist Daniel Kahneman examines why and how we make decisions, explaining that once we know the outcome, we connect the dots in the past that make the outcome seem inevitable and predictable. In other words, we don’t remember how uncertain we were in the past—once you know what happens, you believe your past self was more certain than you were, which leads you to believe that you’re good at predicting the future. If you think this, you may also mistakenly believe that others are good at predicting the future, too.
#2: Modern financial structures are so different from past financial structures that older advice often doesn’t apply today.
Housel explains that many modern financial concepts have existed for an extremely brief time. For example, the market for cryptocurrency—decentralized, digitized currency—was valued at $1.49 billion in 2020, but cryptocurrency didn’t exist in a popular and usable fashion until 2009. Therefore, gleaning financial advice from what happened in the past is somewhat useless because the economic structures that exist are fundamentally different: Investing advice from 20 years ago doesn’t mention cryptocurrency because it didn’t exist yet. So if you rely too much on economic history to predict what’s going to happen next, you will likely fail and may struggle financially as a result.
(Shortform note: In Fooled by Randomness, Taleb makes a practically identical argument, noting that the difference between modern and past structures makes it difficult to apply lessons learned from past structures to the future. However, Housel focuses on major changes in structure, like options that didn’t exist in the past. Conversely, Taleb points out that the details matter too: The Asian markets of the 1990s bear little resemblance to the ones today due to changes in the world economy, but it’s not because stocks work in some fundamentally different way.)
Just because history isn’t as useful as we want it to be doesn’t mean you should ignore history. Rather, Housel argues, you need to use it carefully. To do so, follow three simple rules.
#1: Note the date.
If you’re looking for specific advice, rely on contemporary history. The more recent, the more likely you are to be living in a similar financial situation. (Shortform note: Housel never specifies what counts as contemporary economic history. Consider researching how old potentially relevant financial structures are, and only review material published after that date.)
#2: Look for patterns of behavior.
You can look at broader swathes of history, too—but don’t look for specific advice from it. Instead, use it to find broader patterns and takeaways, such as how people react to uncomfortable situations or to attempts to motivate them. For example, look at what people tend to do with their money when their governments are unstable. (Shortform note: This advice is similar to Housel’s recommendation in Lesson #2 to look for patterns—not specifics—when evaluating the role chance plays in individuals’ financial successes. In both areas, Housel’s advice aims to eliminate the risk that you’ll base your decisions on the effects of random events, instead guiding you to base them on more predictable influences.)
#3: Be open to pivoting.
As evidence of how economic changes affect investing advice, Housel points to Benjamin Graham’s The Intelligent Investor—an enduring investment classic even though its specific recommendations are essentially useless in the modern day. Housel explains that this isn’t a sign of Graham’s lack of investing skill but a sign of Graham’s adaptability and knowledge: Graham wisely updated the techniques in his text five times in a span of 40 years because his previous recommendations didn’t work as well as they used to as the world changed.
(Shortform note: Helpfully, modern editions of The Intelligent Investor don’t require you to differentiate between which principles remain helpful and which recommendations are outdated: The 2003 edition includes commentary from a columnist for the Wall Street Journal that points out how Graham’s advice has been timeless through specific major stock market events.)
By referencing Graham’s adjustments, Housel implies that as you implement the lessons you learned from history, you also must pivot when the situation calls for it. When the world inevitably changes—whether that’s through an unpredictable event or because the government introduces a new economic structure—adjust your strategy accordingly. Don’t blindly follow techniques that worked in the past if they don’t work in your current situation.
(Shortform note: How, exactly, will you know when it’s time to pivot because the situation has changed and the advice you’re following isn’t working? In The Effective Executive, management expert Peter F. Drucker recommends looking at the outcome yourself: If you don’t know what’s actually going on, you can’t evaluate whether what you’re doing is working. In a financial situation, pivot when your strategy is no longer increasing your wealth.)
In Chapter 9, Housel shares another reason people fail to achieve financial success: We confuse being wealthy with being rich.
Housel explains the difference between being wealthy and being rich as follows: If you’re wealthy, you have a lot of money in the bank. In other words, wealth is money you’re not using—it’s money you could use if you wanted to. In contrast, if you’re rich, your current income is high: You have money you’re able to spend on expensive items.
Crucially, Housel contends, you can tell whether someone is rich, but you can’t tell if they’re wealthy. This is because you can see how much someone spends on items, but you can’t see inside of their bank account to see the money they’re not using—in other words, their wealth. Of course, as Housel notes, someone can be both rich and wealthy, but you can only see how rich they are. For example, if you see both Steve and David buy a $100,000 watch, you know both are rich. But you can’t see that Steve, who has 50 times that in his bank account, is wealthy and David, who’s paying for the watch in installments and has hardly any savings, is not.
The Origins of Wealthy vs Rich
In The Millionaire Next Door, Thomas J. Stanley and William D. Danko popularized the difference between being wealthy—having money accumulated—and being rich. Like Housel, they point out that people with high income can lack wealth and that it’s hard to identify wealthy people because they save their money. However, the authors go a step further than Housel: They define your wealth as your net worth, which is your current assets minus your liabilities, and share a formula for discovering how much net worth you should have based on your income and age: Multiply your age by your realized (taxable) annual income, divide it by 10, and subtract any inherited wealth.
Housel argues that when you imagine having a lot of money, you’re usually imagining being rich: You imagine how much more you could spend. But—as obvious as it seems—when you spend money, you lose it. If you had a million dollars and bought everything you wanted, you wouldn’t have a million dollars anymore. The more money you spend, the less wealthy you become.
(Shortform note: You may assume that anybody who actually had lots of money wouldn’t spend it all as they would instinctively know that when you spend your money, you no longer own it. However, several millionaire celebrities have bankrupted themselves due to lavish spending, proving otherwise.)
Housel contends that most people would rather be wealthy than rich. Being wealthy—having money in the bank—gives us freedom to take advantage of more opportunities when they arise, which is ultimately what people really want out of money. (Shortform note: Housel elaborates further on the flexibility that people want from wealth, and why it’s so essential, in Lesson #5.)
So why does knowing the difference between being wealthy and being rich matter? Housel argues that it’s because we learn by imitation, and knowing who to imitate—and who to not imitate—can help us protect our money.
In an ideal world, you could learn how to be wealthy by seeing the self-control that wealthy people exercise. But since wealth is obtained by not spending your money, you can’t see the process. Therefore, it’s hard to learn wealth by imitation—you don’t know who to imitate. (Shortform note: Even if you don’t know who to imitate, you can still discover and imitate the habits that lead to wealth by consuming the right knowledge—like by reading The Millionaire Next Door, which describes the habits of wealthy people.)
But it’s easy to see and imitate people who are rich—and if you don’t understand they might not also be wealthy, you may assume that being wealthy means you can spend money as you wish. But this is the exact opposite of wealth; this will impoverish you. When you understand the difference between being rich and being wealthy, you avoid this trap and prevent yourself from draining your money away.
(Shortform note: Stanley and Danko don’t argue that people who are rich but not wealthy become so by imitating other rich people and overspending; rather, they argue that they’re unknowingly imitating their lower-income parents. Stanley and Danko suggest these rich people mainly want to be “better off than their parents.” But they learned from their parents that the purpose of money is to “spend it when you have it”—and so they spend to appear better off than their parents now, instead of realizing that the purpose of money is to save or invest it so that you can grow wealthy.)
You’ve now learned why so many people fail to achieve financial success. In this section, Housel outlines some mindsets that he recommends you develop to foster a healthy attitude toward money. They involve understanding the true value of money so that you can know what expectations you should and shouldn't have for your wealth.
Housel argues that the true value of money is that it buys you control over your time. He also notes what isn’t the true value of money: Money isn’t valuable because it buys you “more,” and it’s not valuable because it buys you respect.
In Chapters 7 and 10, Housel explains the true value of money: Money buys you control over time, which psychologists contend is the key driver of happiness.
Housel explains that when you have control over your time, you can choose what to do and when you want to do it. Housel argues that this ability—this flexibility—is essential for two main reasons. First, the more flexible you are, the more options you have—and the more economic opportunities you have access to. For example, you can afford to take time off to develop a new skill that sets you apart from your competition instead of getting stuck in a dead-end job. Second, the more flexible you are, the more of a safety net you have to endure the unexpected. For example, if you lose your job, you can take your time choosing your next job; you don’t have to take the first one you’re offered out of economic necessity.
(Shortform note: Financial flexibility isn’t just valuable for individuals—it’s valuable for companies, too. The Covid-19 pandemic prevented many companies from making money, either because they couldn’t provide their goods or because people could no longer afford their services. In such a situation, financial flexibility matters: One paper found that the stock price of highly flexible firms fell by 26% less than the stock price of firms with low flexibility during the collapse period” of February 3 to March 23, 2020.)
Housel argues that having a sense of control over your life is so essential that when we don’t have it, we rebel. Psychologists call this phenomenon “reactance:” People who feel like they don’t have control will refuse to do things they want to do just to regain that sense of control. For example, you might be thrilled about your job’s holiday party—but if they require you to go, you may feel differently.
The Scarcity Principle: Why You Want Control More When You Don’t Have It
Our reaction to having no control over a situation may also be due to the scarcity principle—the idea that we find things with limited availability more appealing. In Influence, psychologist Robert Cialdini defines reactance as an adverse reaction we have to any restriction of our choices and explains that we don’t exhibit it if something is freely available because we don’t feel restricted. But scarcity limits our choices, especially if what we desire was previously abundant—so when something is scarce, we desire it even more than we did before. In other words, when control grows scarce, we want control even more than we did before and so we exhibit reactance.
Moreover, Housel suggests that Americans’ lack of control has caused a national satisfaction problem: American happiness levels aren’t as high as they should be because we lack control over our time. Housel explains that Americans’ median income has nearly doubled since 1955. If money made us happier, we should be twice as happy as we were 50 years ago. But we haven’t become significantly happier since 1955. Housel argues that this is because our relationship with time and work has changed. In the 1950s, most people performed some kind of physical labor. Their jobs ended when they left their workplace. But nowadays, many more people do knowledge work, so we think about our jobs long after we leave the workplace, making us feel like we’re always working and that we don’t have control over our time. Therefore, we’re not as happy as we used to be.
(Shortform note: In direct contrast to Housel, psychologist Steve Pinker suggests that we might be less happy than we used to be because we have too much control over our lives. In 1955, there were strict expectations regarding people’s rules—for example, people had far fewer career options. He suggests that today, we have more freedom but we also have more uncertainty: When you have freedom to choose, you don’t always know what to choose. This uncertainty, Pinker suggests, causes anxiety and reduces our happiness.)
So how can you become happier? Housel admits that this is a difficult dilemma because it’s so individual: Different things make different people happy.
However, knowing what makes most people happy can help—and according to end-of-life interviews, people typically value not consumer purchases but the ability to develop quality relationships or to devote themselves to bettering the world. In other words, most people value the things they had the luxury to do because they controlled their time. Therefore, having more control over your time will likely make you happier, too.
(Shortform note: One way to increase your sense of control over your time—and thus your happiness—may be to determine how much an hour is worth to you. Paying an accountant to file your taxes may initially seem wasteful. But if the time you save doing your taxes gains you more financial value—and allows you to do something you want to do with that time—it may be worth the cost.)
You’ve now learned that money is valuable because it buys you time and flexibility—but how much money should you have? Housel never gives an exact number—but, he warns, wanting more than necessary can drive you to lose not just all your money, but also intangible, irreplaceable things like your freedom. That’s why he thinks that learning to be happy with enough is critical to financial success—a lesson he elaborates on in Chapter 3.
Housel explains that some people are never satisfied: No matter how much money they make, they still want more. This endless pursuit of more can often drive them to risk their existing wealth for wealth they don’t have and don’t even need—and to do so in both legal and illegal ways.
As a legal example, Housel cites the traders worth millions who invested their personal wealth into the hedge fund they managed, Long-Term Capital Management. Their desire for more caused them to take on such a high risk that they all lost their fortunes in one of the strongest markets in history. As an illegal example, Housel cites con artist Bernie Madoff. He didn’t need a Ponzi scheme to make him rich—his firm already made $25 to $50 million a year. But Madoff wasn’t satisfied, and his greed led him to mastermind the Ponzi scheme that ultimately cost him everything.
Not Just Greed: Why Do People Risk Their Wealth?
Housel argues that people like the investors at Long-Term Capital Management (LTCM) and Madoff risk their wealth primarily due to greed, but other observers note that overconfidence and ego may also play a role.
Overconfidence may drive you to risk more than you should because it makes you think that you’re not really risking that much. As one article notes, the investors at LTCM were so overconfident in their investment strategies that they thought their single-day losses would never exceed $35 million; in actuality, the single-day loss that wiped them out was $553 million. Had they realized how much they were really risking, it’s possible they would have thought twice about their actions.
Similarly, Madoff may have committed his crimes not just because he was greedy, but because he wanted to protect his ego. As psychologists note, lots of greedy people never commit fraud. The ones who do often, like Madoff, are initially genuinely successful, which leads them to idealize themselves—so when they start to fail, they turn to fraud to protect their reputations.
But when you learn to be happy with enough money—whatever that amount is for you— you don’t take unnecessary risks with the money you’ve already accumulated. (Shortform note: In Mindfulness in Plain English, meditation master Henepola Gunaratana suggests another method for combating greed and preventing yourself from taking unnecessary risks: By meditating, you can find the emotional root of greed and destroy it.)
So how can you learn to be happy with enough? Housel suggests a few ways:
#1: Stop increasing your lifestyle standards.
If you keep wanting an increasingly lavish lifestyle, you’ll never be satisfied. Not only will you then take dangerous risks to achieve satisfaction, you’ll grow envious of others who live whatever way you want at the time, which will diminish your enjoyment of life. Therefore, Housel states, it’s critical that, once you reach the lifestyle you want, you can be happy at that lifestyle—not the one that’s slightly more prestigious.
(Shortform note: The phenomenon of your lifestyle becoming more expensive as your income grows is known as lifestyle inflation. Housel appears to disapprove of lifestyle inflation as a whole, but other financial experts point out that if your income increases, you should allow yourself to enjoy it. They recommend spending on experiences rather than items: Experiences make you happier than things do, so you’ll feel more satisfied even if you spend the same money—which in turn may prevent you from feeling that your new lifestyle increase isn’t enough and wanting even more.)
#2: Accept that somebody will always have more money than you.
If you’re always comparing yourself to somebody richer, you’ll never be satisfied. Unless you’re the richest person in the world, someone always has more money than you do.
(Shortform note: This might be especially difficult if you’re always seeing how others live on social media. Combat social media envy by deleting your accounts or by unfollowing the people who inspire the most envy.)
#3: Know your values.
When you know your values, you realize that some things are more important than money. Therefore, you don’t risk losing those important things (like your time or freedom) in order to get less important things (like more money). In this way, knowing your values prevents you from taking dangerous risks with your finances.
(Shortform note: “Know your values,” is easy to say but hard to do. If you’re struggling to pinpoint yours, try strategies like listing a few people you love and writing down why they’re important to you.)
Another way to prevent yourself from spending more money than you need to is to understand the lesson Housel shares in Chapter 8: status symbols don’t buy respect.
Housel argues that people often covet status symbols because they want respect. When others admire your possessions, you assume that they’re admiring you. However, Housel contends, when people admire your status symbols, they barely notice you. Rather, they imagine how much other people would admire them if they owned that symbol.
For example, if you buy a mansion and notice delivery drivers gawking at you when they pull up, you imagine that they think, “This house is so nice. The owner must be so sophisticated—I should treat her with respect.” But in actuality, they’re looking only at the house—not you—and thinking, “That house is so nice. If I lived here, people would think I’m so sophisticated and treat me with respect.”
So if you buy a status symbol, Housel recommends, remember that owning it won’t make people respect you as much as you expect. Instead, Housel urges, realize that you’ll gain the most respect from embodying good values like kindness.
(Shortform note: Some studies contradict Housel’s argument and suggest that status symbols do buy respect—in other words, how wealthy you appear affects how well people treat you. In Pitch Anything, sales coach Oren Klaff describes how the higher-status you appear, the more likely people are to follow your lead: When a well-dressed man jaywalked across a busy street into traffic, pedestrians often unthinkingly followed—but they didn’t follow a sloppily dressed person in the same situation. So while someone who sees you in fancy clothes may very well imagine themselves in those clothes, they also probably will treat you with the respect those clothes suggest you deserve.)
Housel argues that the most important value of money is that it buys you control over your time. Take a moment to think about what that might mean for you.
Describe a goal that you have that you aren’t currently working toward because you don’t have enough time to. If you didn’t have your current professional obligations, what would you do with your time instead? Is there a second career you’ve always wanted to pursue? A hobby you’d love to explore? A skill you’d like to master?
How much money or time would it require for you to be free to pursue that goal? If your goal is a major one like a career change, this might require a lot of money, so that you can continue to meet your daily financial obligations. If it’s a smaller goal like a hobby, this might require less money but more free time outside of your work.
How might you adjust your current financial plan to afford that other goal? To afford a large goal, could you sell some high-value assets? To afford a smaller goal, could you budget for fewer restaurant meals or outsource some of your current obligations like housework?
Now that you understand how to think about money, we’ll discuss the essential elements you must include in your financial strategy. Housel posits that there are three main elements: You must take advantage of compounding, you must save money, and you must include a plan for when things go wrong.
In Chapter 4, Housel explains that the longer you invest, the more money you make because returns compound—that is, they build on previous returns to make ever-increasing returns. Housel recommends that you take advantage of compounding by finding investments that return solid, consistent results over time. He argues that ultimately, this strategy will make you the most money.
He argues that because of the power of compounding, how long you invest is the most important factor determining your investment success—even more than other factors that seem intuitively important, like your annual returns. Housel illustrates this point with the stories of James Simons and Warren Buffett. Hedge fund executive James Simons is arguably the world’s best investor: Since 1988, his annual returns have compounded at 66%—three times the rate of Buffett’s investments. However, Buffett is 75% wealthier than Simons. This is because Simons only started achieving his 66% rate when he was 50, while Buffett has been earning 22% a year since he was 10 years old. Buffett is wealthier not because he’s a better investor, but because he’s been investing for much longer.
(Shortform note: Buffett and Simons are also good examples of the difference between what journalist David Epstein calls specialists, who master one professional field, and generalists, who have broad competence in many professional fields. Buffett has been investing his entire life; Simons had a successful career as a mathematician and codebreaker before embarking on an investing career in his 40s. In Range, Epstein suggests that being a generalist is a more reliable path to success than being a specialist. But the stories of Buffett and Simons prove that you can achieve success both ways.)
Housel contends that people often ignore the power of compounding because it’s so counterintuitive: Even when you know compounding works, it’s still hard to imagine that unimpressive returns lead to impressive numbers just because you waited. As such, we try to achieve impressive numbers through methods that intuitively seem better—like finding the investments with the highest annual returns—even though they don’t work as well as compounding does.
(Shortform note: Why is compounding so counterintuitive? Psychologist Daniel Kahneman explains that humans are notoriously bad at questioning what evidence might be missing. So even if we logically know that how long you invest matters more than how much an investment returns in an individual year, we struggle to conceptualize and act on this information because we can’t see the numbers in our bank account 50 years from now.)
When You Invest Matters, Too
Interestingly, an article Housel wrote in 2014 adds a nuance to the idea that how long you invest is the most important factor in your investment success: He describes how, while how long you invest matters, the specific years in which you invest still significantly impact on how much money you gain over time. For example, someone who invested $500 in the S&P each month would have earned nearly $400,000 if they’d done so in the 20 years between 1980 and 2000, but only $60,000 if they’d done so in the 20 years between 1962 and 1982. This only applies if you invest little by little, not if you invest a lump sum at once.
To avoid a similar fate, Housel recommends strategies similar to those we’ll learn about in Lesson 10: Diversify your investments to reduce the risk of all your assets having a bad year, and make sure that you have enough flexibility with your money to, for example, let it compound a few years longer if you retire in a bear market.
In Chapter 10, Housel shares the second essential element of a successful financial strategy: Prioritize saving money.
Housel notes that many people don't save because they think saving is either unnecessary or impossible.
(Shortform note: A 2019 survey shed further light on why people don’t save: When asked why they didn’t save money, Americans most frequently said they couldn’t afford to save due to their expenses—and if you can’t afford your day-to-day life, you won’t save. To help prioritize saving money, consider reducing your expenses first with strategies like eliminating unnecessary expenses from your life.)
Housel argues that people who avoid saving are wrong for the following reasons:
First, saving is essential to building wealth due to the nature of wealth. As we've seen, wealth is the money you don't use—in other words, it's the money you save. Therefore, it's impossible to build wealth unless you save money.
Second, saving is the most reliable way to build wealth because it's totally in your control. Both of the other methods of building wealth—increasing your income and profiting off your investments—are full of uncertainty: For example, an investment strategy that works today might not work tomorrow depending on how the market goes. Saving money doesn't involve such risks: You always control how much you save, and saving will be just as effective tomorrow as it is today.
(Shortform note: Not all thought leaders distinguish between saving and investing the way that Housel does. For example, in The Success Principles, Jack Canfield states that you should maximize your savings by investing them so that they can accumulate the maximum compound interest; he never suggests leaving some money in the bank. But by Housel’s definition, your investments don’t necessarily count as savings: If you’re not using them, they might be part of your wealth—but you can’t rely on them because you could lose them at any moment.)
Finally, saving is a comparatively easy way to build wealth. If Kei and Nick have the same net worth but Nick requires half as much as Kei to be happy, Nick can save twice as much as Kei and thus build his wealth twice as fast. This is a far easier task than Nick trying to increase his income or investment returns. (Shortform note: Saving can be so easy you only have to think about it once: Behavioral scientists recommend setting up a system that automatically saves a portion of your income every time you receive any.)
So how, exactly, can you ensure you save money? Housel recommends that you stop caring about others' opinions.
Housel suggests that we overspend because we care too much about others’ opinions of us. He posits that there are three different levels of spending: The lowest level covers your necessities, the middle buys you comfort, and the highest allows you to purchase luxurious basics. But once you have enough income to cover the third level, Housel argues, you’re not spending for yourself. Instead, you’re spending for your ego—to prove to others how much money you have.
How Do You Know When You’re Spending Too Much?
Housel argues that you should only spend enough to purchase luxurious basics, which are “comfortable, entertaining and enlightening”—but since this is subjective, it’s hard to know when you’re spending too much: you might think an apartment that’s 25 square feet is comfortable for one person, but someone else may disagree. On the one hand, it makes sense that Housel doesn’t define his levels of spending: As we learned in Lesson #1, what’s basic to you isn’t necessarily basic to someone else. On the other hand, his lack of definition makes it difficult to determine when you’ve gone too far: How can you know when you’re spending for your ego? The answer may be to determine what counts as enough, as we saw in Lesson #6. But since Housel states in the introduction that each chapter is meant to stand on its own, this isn’t clear.
By learning to be humble and ignore others’ opinions, you’ll naturally want less. When you want less, you’ll spend less, and you’ll save more.
(Shortform note: How can you learn to ignore others’ opinions? In How to Stop Worrying and Start Living, Dale Carnegie recommends several strategies to help you handle criticism from others, like becoming your own worst critic.)
In Chapter 13, Housel shares the final essential element of any financial strategy: Plan for things to go wrong.
Housel warns that people are often too optimistic with their finances, which leads them to put too much of their wealth at risk at any one time on a strategy that can be taken down by any one factor of bad luck.
(Shortform note: Why do people act too optimistically with their finances? In the blog post that he based this book on, Housel suggests that it’s partly because people are uncomfortable with being wrong—so they grow convinced that their idea of the future is right. He makes a similar argument in Lesson #18.)
As Housel notes, bad luck is an inevitable part of life. But unknown risks are, by definition, unknown, so we can’t predict them. Therefore, he advises that you plan for things to go wrong by following this advice:
Never put your entire fortune at risk, and instead risk only a small portion at a time. Keep enough invested in safe investments so that you can cover any losses incurred by your riskier investments.
Keeping Your Fortune Safe: The Extreme Version
In Antifragile, Taleb argues that you must embrace antifragility—things that get stronger instead of weaker under stress—to thrive in our modern world. He warns against putting your entire fortune at risk, but he emphasizes the extreme options over the average ones. He recommends investing with the barbell model: Keep one end extremely safe (like by having 90% of your savings in the bank), and one end high-risk and high-reward (like by investing in extremely volatile stocks that might pay off massively). This way, you could earn a lot of money but you can only ever 10% of your money. But unlike Housel, Taleb urges you to avoid the middle-of-the-road strategies: It’s by protecting yourself from disaster and then chasing the greatest gains with your leftover money that you ensure that chance will, on average, work in your favor.
Don’t create strategies that hinge on one single factor because if that factor goes wrong, the entire strategy fails. Instead, have backup systems in place that protect you when a particular factor fails. For example, don’t rely on a single source of income to meet all your spending needs. Keep a backup savings account so that you can protect yourself even if you lose all your income.
(Shortform note: A single factor that many of us base our financial lives on is our ability to keep working. However, you could suffer a medical condition that prevents you from working—and while health insurance will pay your medical bills, you’re still responsible for your everyday expenses. That’s why financial experts recommend not just having savings and health insurance but also disability insurance.)
When planning for retirement, save one-third more than you think you need to. This way, you’ll have enough saved even if your future returns are one-third less than you expect.
(Shortform note: Another reason you might want to save more than you think you need for retirement is that, in emergency situations, you can use your retirement savings. In I Will Teach You to Be Rich, financial expert Ramit Sethi suggests that if you end up with unexpected expenses and your only option is to use your credit card, you should consider withdrawing money from your retirement account instead. While this will incur losses on your retirement earnings, you’ll still save more than if you increase your existing credit card balance—and the exorbitant interest rates that come with it.)
Housel explains that planning for inevitable setbacks protects you in several ways.
It reduces the need for your predictions to be accurate. If you aren’t correct in how the stock market is going to go, for example, you won’t lose everything if you've only risked some of your wealth on it. Your predictions don’t matter as much. (Shortform note: In this way, planning for setbacks reflects your humility: If you’re convinced you can’t fail, you won’t bother to plan for failure. So, increasing your humility may also increase the likelihood that you’ll plan for error. To increase your humility, consider strategies like imagining times when you were humble prior to creating your financial plan.)
It allows you to endure losses long enough to be positioned to take advantage of opportunities when they arise. When you can weather occasional losses, you’ll still be in the game to reap the occasional windfall. Windfalls are infrequent but they can be the source of significant earnings if you’re able to grab them. This applies not only to the stock market but also to other types of investments. For example, if you’re running a company, you need to ensure it can get through times of no revenue so that you can be positioned to increase your business when the opportunity arises. Another example is in the housing market: If a downturn wipes your savings out, you won’t be able to take advantage of low housing prices, which could possibly lead to high future returns.
(Shortform note: Housel’s warning about being unable to take advantage of the housing market implies that he considers buying a house to be an investment. Some financial experts warn against this idea, stating that you should consider housing a consumption good, not an investment. This is because houses have value based on the economic opportunities of where they are—so if you live in a house and your local economic opportunities suddenly decline, you now have both fewer economic opportunities and a house that’s declined in value and may be a liability instead of an asset.)
It reduces the danger that you’ll make poor choices because of emotions. If you know most of your fortune is protected, you won’t overreact to bad results that affect some of your fortune. (Shortform note: Planning for setbacks may also protect your finances from the broader impact your emotions can have on your finances. For example, one study found that if you make financial decisions while sad, you’re more likely to prioritize short-term over long-term gains. But if you have, for example, a bigger savings account, you’ll be better able to handle the potential financial consequences of being sad for a long time.)
Now that you’ve learned why planning for setbacks is essential to a successful financial strategy, you can think about where your own financial strategy might be vulnerable—and how to protect yourself.
First, select a financial area of focus: either your income or your investments. Describe a worst-case scenario for that area and the results. What would happen if, for example, you get fired or the market you’re invested in crashes?
Now, imagine that the worst-case scenario you described above happens tomorrow. What financial safeguards do you have in place right now to protect you from that impact?
Would those safeguards protect you adequately from the fallout of your worst-case scenario? In what areas would you still need to adjust your investments, behavior, or plans for the future?
If the financial safeguards you’ve placed already don’t seem like enough, write down a few additional safeguards you can implement. For example, if your worst-case scenario would mean you pass away and leave your family without a household income, you might look into purchasing life insurance.
You now know what to include in your financial strategy—but how do you make sure your strategy is one you can stick to over decades? Housel names three principles to keep in mind: Expect your future goals to change, prioritize sense over logic, and develop a survival mentality.
In Chapter 14, Housel shares one critical key to developing a long-term strategy you can stick to over decades: Expect your future goals to change, react quickly when they do, and build flexibility into your financial plan.
As we’ve seen, one major element of financial success is letting your money sit as long as possible so it accumulates the maximum amount of compound interest. Housel posits that leaving your money alone for this long is difficult partly because people change, but since they’re unable to predict how they’ll change, they don’t invest their money in ways that will work for their future selves.
Housel explains that when making financial plans, most people fall victim to the end-of-history illusion, a psychological phenomenon where you recognize that you’ve changed significantly from who you were, but you don’t expect to change significantly from who you are now. But in reality, you are likely to change just as much in the future as you did in the past. For example, if you’ve changed your career twice between 20 and 30, you might recognize that you’ve changed significantly since 20, but you expect that you won’t change your career again for the rest of your life.
(Shortform note: Why do people fall for the end-of-history illusion? The psychologists who discovered the end-of-history illusion (which they also called the end-of-history effect) suggest a few possibilities. One is that believing you don’t change is comforting: It’s terrifying to imagine that, for example, your future self is so different from your current self that any plans you make now—both financial and otherwise—won’t work for them.)
How can you reconcile the reality that you’ll change with the necessity of leaving your money alone?
Housel makes two recommendations.
#1: Don’t make extreme financial plans.
Specifically, Housel recommends avoiding any plans that involve extremes in your commute, savings, or personal time, and creating plans that involve moderation in all three areas instead.
(Shortform note: What exactly counts as extremes in your commute, savings, or personal time? Housel never defines this, and what counts as moderation in all three will likely differ drastically depending on your age, location, and personal location. So instead of comparing yourself to others not in your situation, consider going with the options that feel moderate to you, even if they don’t align with what is actually average.)
Why? First, Housel explains, if you make an extreme financial plan, you may regret your choices. For example, an entrepreneur who devotes 100% of his time to building his company and zero time on his relationships may be happy in his 20s. But he may regret this decision at 45, when he’s financially successful but has no loved ones to share this success with.
(Shortform note: If you do make an extreme financial plan and end up regretting it, one way to ease the pain is to find the silver lining: Learn something from the regret and apply it to your actions in the future. That way, even if you don’t get your new goal, you won’t feel as badly. You’ll also likely feel less stressed about having to work harder for your new goal because you won’t consider the time a total waste.)
Second, Housel states, if you make an extreme financial plan and change it later, you won’t be able to take full advantage of compound returns. For example, you may believe that you never want to settle in one place and thus happily survive off part-time jobs that pay just enough to let you travel the world cheaply. But if you eventually tire of traveling and want to settle down, you may discover that you can’t afford to retire where you want. Had you taken slightly better-paying jobs and saved some money, you would have a decade’s worth of compound returns—but you can never get that money back now.
(Shortform note: Remember that you may change your financial plan not because you want to but because you have to. If this happens, you may be more exposed to financial ruin if you’ve been following an extreme financial plan than if you’d been following a more moderate one. This is because extreme plans can help you achieve one goal but can leave you vulnerable to things going wrong in other areas of your finances.)
#2. Allow yourself to change.
When your values and goals inevitably do change, Housel recommends, accept this change and adjust your strategy accordingly as soon as possible. In doing so, you minimize the effects of the sunk cost fallacy: our tendency to stick to choices we made because of the effort we’ve invested in them, even though we can never get that effort back.
If you fall victim to the sunk cost fallacy, you might, for example, spend years being miserable as a lawyer because you already invested three years in law school. But law school is a sunk cost, or an investment you can’t recuperate: No matter what you do, you’ll never get those three years back. The faster you admit that you’re miserable and change your career plan, the less time you’ll spend being miserable as a lawyer.
(Shortform note: Refusing to change your current actions due to the sunk cost fallacy doesn’t just affect your finances; it can also lead you to stay in an unsatisfying relationship. In The Defining Decade, Meg Jay notes that sunk costs have an especially strong hold over people who’ve chosen to move in together before getting engaged, because it becomes harder to extricate themselves from things like shared bills or pets.)
You’ve now learned why you need to expect your future self to change when creating a long-term financial strategy. In Chapter 11, Housel shares another key to creating a long-term financial strategy you can stick to through decades: Develop a strategy that’s sensible, not logical. Housel implies that most people mistakenly think they want a logical financial strategy (one driven by mathematically sound strategies) because that will make them the most money. However, he argues, what people really want is a sensible strategy, which prioritizes your peace of mind, and that following a sensible strategy will maximize your earnings in the long run.
(Shortform note: The more complicated something is, the smarter it seems. So a sensible strategy, which prioritizes your peace of mind over complicated math, may seem too simple to work. But in a 2015 article, Housel argues that you don’t need to understand the math behind why your strategy works—only its real-world consequences.)
Housel argues that there are two major problems with purely logical strategies.
First, purely logical strategies don’t try to prevent regret, since they’re focused on making as much money as possible. However, most people also want to feel as little regret as possible. Regret might come from missing an opportunity, or it might come from how negatively you feel if people around you think you've invested poorly. Purely mathematically driven strategies might require you to pass on some investment opportunities, making you feel like other people are judging you for poor insights. In this way, strictly logical strategies sometimes don’t coordinate with our sometimes-illogical desires.
(Shortform note: The fact that purely logical strategies don’t try to prevent regret may have some benefits: One psychologist argues that if you try too hard to prevent regret, you’ll grow too scared to take the risks you need to achieve your goals.)
Second, purely logical strategies often aren’t realistic. As an example, Housel cites a study that recommended a retirement savings strategy in which you invest two dollars in the stock market for every one dollar you own (putting yourself into debt to do so), starting from a young age. The study showed that even if you lose your money in a market downturn, you’ll eventually regain your wealth in the long run if you simply continue to invest two dollars for every dollar you own. Housel agrees that this strategy is mathematically optimal but notes that it would never work in real life: If following a strategy lost someone all their money, no one would continue to follow it.
(Shortform note: If a strategy is obviously not realistic—like the one Housel cites—why would people follow it? In the blog post his book is based on, Housel argues that we’re often overly impressed with the academic credentials of these studies’ authors, so that we follow their advice blindly. Fancy degrees make people think you know what you’re doing. However, in finance, Housel argues, academic knowledge doesn’t guarantee financial success.)
Housel argues you’re better off following a sensible strategy, even if it doesn’t perfectly maximize your earnings, because it can account for the non-financial elements you care about—like your desire to prevent regret or the ease of following a strategy—and therefore, will ultimately make you more money.
Why, exactly, does this happen? As Housel repeatedly states, the longer you have money in the market, the more likely you are to increase it. Therefore, the best long-term financial strategy is to pick a strategy and commit to it long-term. Because you’re more likely to stray from a strictly logical strategy if it drives you to feel regret or if it’s unreasonably difficult to follow, a sensible strategy—one that’s easier to stick to—will ultimately make you more money.
(Shortform note: One easy way to remain committed to a long-term strategy—that is also sensible because it’s easy to follow—is to follow Sethi’s advice in I Will Teach You To Be Rich and automate your investments. Behavioral scientists argue that automating your finances is the best approach because we tend to keep doing whatever we were doing—so if you automate your investments, you’re less likely to change your strategy simply because it’s too much work and you can keep investing even if you do nothing.)
As an example, Housel notes that many people have a “home bias:” They only invest in their home country. Given how many countries there are, this is illogical. But if you feel more kinship with companies from your country, it’s sensible: Investing requires you to trust your money to strangers, so you should find the strangers you’re most comfortable with.
(Shortform note: Housel never points out that there are legitimate, logical reasons to invest in your home country over a foreign one—like the fact that most people will be more familiar with the laws, the market and the language of their own country than of others’.)
How, exactly, do you create a sensible financial strategy?
One method Housel suggests is to invest in companies you love. This is illogical: Your personal feelings about a company have no bearing on their earning potential. However, when a company you love does poorly, you’ll be far less likely to abandon your investment because you genuinely care about the company, want to support it, and believe that it will ultimately be successful because you’re confident in its mission. By investing in companies you love, you’ll stay in the market longer, which will ultimately lead to more financial success.
(Shortform note: If you love the company you work for, you may want to invest in it. After all, you’re far less likely to abandon an investment if you not only love that company but you’re employed by that company, too. However, other financial experts warn against this strategy because it doubles your financial risk: If the company fails, you’ll lose money both because your investments will become worthless and because you’ll be out of a job.)
In order to create a financial strategy you can stick to, you must plan how you’ll keep any wealth you accumulate. To do so, Housel argues in Chapter 5, you must develop a survival mentality.
Housel explains that when you have a survival mentality, you recognize that you could lose all your money and not be able to gain it back—and so you take measures to prevent that from happening: You are humble, frugal, and you avoid unwise risks. You focus not on building your wealth but on protecting it so that your assets can accumulate the maximum possible amount of compound interest.
(Shortform note: Housel’s recommendation to develop a survival mentality is somewhat similar to advice given in financial advice classic The Richest Man in Babylon, in which George Clason suggests that the first thing you should do with the money you’ve saved is to protect it. But unlike Housel, who discusses the importance of a survival mentality primarily when investing, Clason recommends several ways to protect your money that have nothing to do with investing—like not loaning your money to friends and family who won’t repay you.)
#1: You prioritize stability over profit.
Housel explains that when you have a survival mindset, you believe that long-term consistent gains from compounding will make you the most money in the long run. As such, you prioritize the measures that keep your returns the most stable over time instead of measures that might temporarily increase your earnings but ultimately destabilize your earnings and lose you money.
For example, you may be tempted to liquidate all your stocks and invest heavily in a burgeoning cryptocurrency market. But with a survival mindset, you’ll realize that given the volatility of cryptocurrency, you should leave at least some of your stocks in the stabler stock market so they can compound long-term.
(Shortform note: In Fooled by Randomness, Taleb shares another reason to prioritize stability over profit: Even if you do get lucky and win a windfall, you’ll probably lose it again. He argues that both good and bad luck eventually run out, and outliers of either success or failure eventually earn outcomes more closely matching their skills—so you should focus on succeeding via measures that are less prone to chance.)
#2: You prioritize room for error when creating plans.
As we discussed earlier, the future is uncertain. So if your financial plan only works in a narrow range of possible futures, you’re placing yourself in a precarious position. When you have a survival mentality, Housel explains, you include lots of room for error in your financial plan. By doing so, you plan for a wide range of possibilities and increase the likelihood that you’ll become financially successful even if a lot of things don’t go your way.
(Shortform note: Housel shares several ways to build room for error into your financial plan in Lesson #10, but one area he doesn’t discuss is your career. In Range, Epstein recommends becoming a generalist who has broad competence in many professional fields instead of a specialist who masters just one. Epstein argues that generalism helps you solve problems you’ve never seen before—so being a generalist will likely provide you with more career flexibility, which is a form of having room for error in your financial plan. With career flexibility, you can survive even if your industry becomes obsolete.)
#3: You are realistically optimistic.
Housel explains that with a survival mentality, you have faith that you’ll gain money in the long term, but you recognize the reality that you’ll face many financial challenges in the short term. In other words, realistic optimism requires simultaneous hope and paranoia.
Believing both that you’ll gain money long-term and lose short-term may seem initially unreasonable. However, Housel explains that many financial factors—like the economy, the stock market, and your career—often follow a trajectory of long-term growth but short-term loss. For example, Housel notes, the U.S. economy grew dramatically between 1850 and 2020, with the per capita G.D.P. increasing from less than $10 to nearly $100. However, the U.S. also spent 48 of those years in 33 recessions.
As such, Housel argues, feeling simultaneous hope and paranoia is reasonable, and the two emotions are complementary: Because you’re paranoid about your short-term financial losses, you’ll take the measures necessary to protect your money so that you can gain more of it in the long term.
(Shortform note: Psychologists support Housel’s argument that realistic optimism is key to success. They explain that while the most successful people believe they’ll succeed, they also believe that this success will come with difficulty—so they plan for things to go wrong and stay in the game longer when things do. Therefore, psychologists recommend visualizing what you’ll do in order to succeed—not the success itself. Try this yourself by reviewing the US’ economic history: If you faced similar situations, what would you want to do? Keep in mind what you learned in Lesson #3 about focusing on patterns to learn most effectively from economic history.)
In the previous section, you learned several keys to creating a financial strategy that you can stick to long-term. But in an ever-fluctuating market, how do you handle the inevitable bad times? Housel shares three lessons to help you evaluate bad news appropriately: Don’t be put off by either uncertainty or pessimism and remember that even if you fail frequently, you can still succeed.
In Chapter 15, Housel shares one key to reacting well to bad news: Don’t be put off by uncertainty. He argues that in order to achieve long-term investing success, you must accept that you’ll feel uncertainty as the market fluctuates. Otherwise, you won’t be able to endure the uncertainty long enough to let your returns compound.
Housel explains that investing inherently includes some measure of uncertainty—and the higher the potential gain, the more uncertainty you feel. For example, the longer you let your stocks compound, the more money you can gain, but the longer you have to feel the uncertainty of not knowing exactly what will happen to your money. Conversely, if you hold low-value bonds, you won’t accrue much value—but since bonds are far less volatile than stocks, you won’t feel much uncertainty, either.
(Shortform note: Housel assumes that this uncertainty or discomfort is inevitable when investing—and while some discomfort may be normal, constant discomfort is not. Several experts recommend strategies to decrease the anxiety you feel around your investments, like checking them once a quarter at most.)
According to Housel, most people try to limit the uncertainty they experience by timing the market—but since timing the market is impossible, they end up losing money. As an example, Housel points to the fact that tactical mutual funds, which bounce between stocks and bonds in an attempt to strategically avoid market risk, generally do worse than more traditional stock-bond funds that stick to steady investments regardless of market fluctuations. In other words, nobody can successfully time the market—not even professionals.
(Shortform note: Ironically, in The Intelligent Investor, Graham suggests that some people time the market not due to fear of uncertainty but due to overconfidence: They have an arrogant presumption that if you’re smart enough, you can predict how the market will move.)
Therefore, Housel recommends, instead of trying to avoid uncertainty, accept that uncertainty is inevitable when investing. Remind yourself that you’re trading your short-term peace of mind for potential long-term investing success, and use that knowledge to endure the market long enough to let your returns compound.
(Shortform note: In his book, Housel focuses exclusively on the toll that investing in the stock market takes on your peace of mind. But in the blog post he based the book on, Housel discusses other financial areas as well, arguing that every financial reward you achieve takes a toll on some aspect of your life, and you can only achieve the reward if you accept each of those tolls. For example, you may patent an invention that earns you millions—but you can only develop that invention by accepting the toll working on it takes on your social life.)
Just as you shouldn’t be put off by uncertainty, in Chapter 17, Housel suggests, don’t be put off by pessimism.
Housel explains that we’re likely to believe financial pessimists because they tend to sound smarter and more reasonable than optimists. However, Housel contends, this is a mistake: Given our world’s history of long-term growth, the optimistic viewpoint is generally more reasonable than the pessimistic. Therefore, he argues, you must be able to evaluate financial pessimism appropriately so you don’t overreact when you encounter it.
To react appropriately to financial pessimism, Housel argues, you must understand why it’s so tempting. Housel explains that, while pessimism in general is alluring partly due to our instinct to prioritize threats over opportunities, financial pessimism in particular seems especially reasonable for three main reasons.
(Shortform note: In the blog post he based his book on, Housel presents a number of reasons that financial pessimism seems smarter than optimism that he doesn’t include in this book. Notably, he discusses how people are skeptical of optimistic viewpoints partly because the finance industry is full of hacks who’ll scam you with stories that are “too good to be true”—a danger you’ll learn more about in Lesson #18. So while you shouldn’t overreact when you encounter pessimism, it may be unwise to discount it entirely, too.)
#1: We pay more attention to bad financial news because we’re afraid that it might affect us, too.
Housel explains that since our modern financial systems and economy are so interconnected, a negative event in one sector is likely to affect someone in another sector—even if those sectors aren’t related. For example, the housing market crash of 2008 didn’t just affect real estate investors; it prompted a nationwide recession that affected everyone, including people who hadn’t invested in real estate.
(Shortform note: In the blog post he based this book on, Housel shares another reason we pay attention to financial news: Money has competitions, rules, and upsets—like a game—so it’s entertaining. There, he also argues that we pay attention to financial news because others’ actions may affect our own finances. But, instead of arguing that we fear this, Housel argues that we enjoy this because, when you’re emotionally invested in the outcome, watching the game of money becomes more entertaining.)
#2. It’s easier to make a pessimistic forecast than an optimistic one.
Housel argues that many people forecast pessimistic outcomes by assuming that the current trend will continue and ignoring how the market might adapt to the world’s needs. However, Housel explains, extreme trends normally don’t continue because the markets adapt to extreme circumstances. For example, Housel cites a 2008 prediction that the world would run out of oil because China would need 98 million barrels a day by 2030 but we couldn’t produce more than 85 million. This prediction didn’t come true because the market adapted: China’s increasing demand for oil raised oil prices, which incentivized people to develop better drilling technologies and to drill in places that were previously economically unviable.
(Shortform note: Instead of forecasting the future by extending current trends, management consultant David Mattin recommends focusing on what doesn’t change—and the fact that humans inevitably adapt to extreme circumstances may be an example of that. For example, humans faced the consequences of oil overuse on the climate and adapted by electrifying vehicles. Experts now expect Chinese oil consumption in 2030 to be lower than their 2008 predictions because they’ll use more electricity and less oil in their transportation.)
Because predicting how the market might change is difficult, economic forecasters often take the easy route and ignore it. (Shortform note: In other words, the economic forecasters fall victim to a mistake we learned about in Lesson 3: They don’t consider that unpredictable events might surprise them.)
Furthermore, it’s easy to believe these forecasts because they don’t require you to imagine an entirely new world: They work in a world that’s familiar to you. (Shortform note: We may also believe these forecasts simply because we like them more: The mere-exposure effect is a psychological phenomenon where people like something more merely because they’re familiar with it.)
#3: It’s easier to notice negative events because they happen more suddenly.
Housel explains that progress compounds slowly—over months and years, if not decades. So noticing this progress requires a lot of work: You have to pay attention to small, incremental growth over a long period of time and you have to clearly remember the state of a situation in the distant past, both of which are hard to do. As such, most of us are slow to notice progress if we notice it at all. Conversely, Housel argues, destruction occurs quickly, often with just one dramatic event. As such, it captures our attention in a way that progress doesn’t.
(Shortform note: How can you make noticing progress easier? Consider noticing and celebrating small wins on issues you care about—no matter how small. In The Power of Moments, Chip and Dan Heath explain that noticing and celebrating small wins makes the long-term goal feel more attainable. While the Heaths recommend celebrating your wins to achieve your own long-term goals, the idea is presumably applicable to goals you’re invested in but not necessarily involved in, like a political issue you care about.)
You now know why you shouldn’t be discouraged by bad news. In Chapter 6, Housel shares another reason to remain optimistic: Even if you fail frequently, you can still succeed.
Housel explains that nearly every successful financial venture you hear about owes its success to low-probability outlier events—luck. These events, when positive, compensate for a larger number of smaller setbacks that a company might go through. For example, the successful companies that drive investment returns are all outliers. As Housel notes, the assets of the Russell 3000 Index, which invests in public companies, increased by nearly 75 times over 34 years. But 40% of the index’s companies lost most of their value. The gain was driven by just 7% of the index’s companies—the outlier events—which were successful enough to offset the 40% that failed.
The Role of Luck in Successful Companies
The Russel 3000 index represents the United States’ 3000 largest companies, serves as the basis of many financial products, and strives to be the “benchmark of the entire U.S. stock market, indicating that the companies included in the index are all fairly successful. This fact supports Housel’s theory that it’s luck that separates the most successful of these from the rest, as we can assume that all of them are at least somewhat regularly making smart business decisions, and yet it’s only 7% that break away from the pack with outstanding results.
This calls into question Housel’s earlier advice to watch for patterns—if 40% of a group as competent as the companies in the Russell Index fail, it’s difficult to know which patterns of behavior to emulate and which to dismiss. This is why even business books, which try to collect and share these patterns, don’t always get it right. Sixteen of the 50 companies highlighted in three business classics failed within a few years of the books’ publications, and only five continued to impress years later.
Similarly, outlier events drive the success of individual companies. For example, Nintendo failed repeatedly to break into the American video game market until the massive success of Super Mario Bros.
Crucially, outlier events are powerful enough that they offset the failures: It didn’t matter that Nintendo’s other products failed because Super Mario Bros. did so well that it accounted for the losses.
(Shortform note: In this chapter, Housel only discusses the positive impact that outlier events have. However, the opposite is also technically true: a negative outlier event could drive the failure of an otherwise successful company because it was so powerful that it offset all of the other successes.)
Since we only pay attention to these outlier events—and not to the failures that the outlier events offset—we forget how rare outlier events are (one in a million, in many cases) and conversely just how common failure is. As such, we overreact when failures inevitably happen to our own ventures. But when you realize how common failure is, you realize that you can fail most of the time and still be successful—and thus, you can react to your failures appropriately.
(Shortform note: While, as Housel notes, we rarely pay attention to the failed products or companies that the outliers offset, we do pay attention to these failures in the context of individuals’ careers: We often talk about how often the successful people failed before achieving their (outlier) success. Reminding yourself of stories like these—like the fact that Richard Branson founded 400 companies before moneymaker Virgin Galactic—may help you remain calm next time you fail.)
What, exactly, counts as an appropriate reaction to failure?
First, Housel recommends, pay attention not to the extent or frequency of individual failures but to the impact of your financial failures on your overall financial health. Housel argues that the world’s most successful people probably fail just as frequently as you do. But we judge their success by the overall impact their outlier events—the tiny percentage of actions that led to their success—had. Similarly, the outlier events in your life can offset the impact of many individual failures. Therefore, paying too much attention to how often you fail or the outcome of an individual investment paints an inaccurate picture of your financial health. Instead, pay attention to your overall financial health, since that’s what matters.
(Shortform note: To avoid focusing on the negative impact of failure, experts recommend that you reframe your view of failure, seeing each failure as an opportunity to learn what not to do in the future.)
Second, Housel recommends, remain calm when others panic. Housel implies that people panic and pull their investments out when the market fluctuates because they’re trying to time the market—to avoid the market when it goes down and jump back in when it rises. But this is impossible: Nobody can successfully time the market. Instead, Housel recommends, accept that it’s OK to lose money sometimes because individual failures probably won’t matter in the long run. Once you do, you’ll be able to leave your investments alone even when the market fluctuates—and since they’ll be in the market longer, they’ll compound more and make more money.
(Shortform note: If you’re tempted to pull your investments out of the market when it fluctuates, remember this statistic from I Will Teach You To Be Rich: On average, the stock market’s annual net return is about 8% (after accounting for inflation). That number is an average from decades worth of data, which means that your money will earn an average of 8% per year over the long term, even if that rate fluctuates in the short term. So no matter how badly things go, you’ll still probably average about 8% gain in the long run.)
Sticking to a long-term financial strategy doesn’t just require you to understand the mindsets above—it also requires you to know how the information you encounter affects your decisions so that you can make better decisions. In this section, we’ll share Housel’s two lessons that help ensure you pay attention to the right information: Know your personal financial goals, and be careful what stories you believe about money.
In Chapter 16, Housel argues that one way to ensure you pay attention to the right information is to know what financial goals matter to you personally so that you don’t get caught up chasing the goals of other people. In other words, don’t get caught up in a herd mentality chasing investment opportunities that lots of other people are chasing, just because others are doing it.
Housel explains that when you know your financial goals, you can ignore irrelevant information that might lead you to make poor decisions, such as basing your financial moves on others’ actions, and thus you’re able to make better financial decisions and better protect your financial health.
To demonstrate the risks of paying attention to the wrong information, Housel points to the economic devastation caused by bubbles. A bubble is an economic situation where an asset price becomes significantly higher than the asset’s actual worth. It causes harm, Housel argues, because during a bubble, long-term investors base their financial decisions on information they don’t realize is only relevant to short-term traders.
Housel explains that in a bubble, short-term traders set the price of an asset class: They see an increasing asset price and purchase it, assuming it will continue to increase. Their purchase pushes the price up more, which attracts more short-term traders—until most of the people invested in a particular asset class are short-term traders, which is when the bubble forms. When this happens, the price the short-term traders are willing to pay for an asset becomes the only price at which it’s available.
Housel explains that this price is reasonable for a short-term trader but not reasonable for a long-term investor. A short-term trader who cares only that the asset price rises in a few hours or days can reasonably purchase assets at a much higher price than a long-term investor, who wants any asset she buys to continue increasing for decades.
(Shortform note: So how do you determine what is a reasonable price for an asset? Housel doesn’t recommend a formula, but one way is to follow the 50/30/20 budgeting strategy: Spend 50% of your take-home pay on what you need, 30% on what you want, and 20% on savings and debt. With this strategy, you wouldn’t invest in any assets that cost more than your 20% savings budget for the month.)
Unfortunately, long-term investors often don’t realize that the asset price available in a bubble doesn’t make sense for their own goals. They mistakenly assume that since others are buying at that price, they should also buy at that price. When the bubble inevitably bursts, their long-term plans suffer dramatically.
How the Information Age Impacts Our Investing Decisions
Past bubbles—like the dot-com bubble Housel discusses—mostly occurred before the Internet was widely available: People got limited information from the radio or TV. But we now have constant access to unlimited information: How does this affect our experience of bubbles?~~ ~~
~~> ~~In some ways, the Internet has made bubbles more dangerous for unsuspecting investors. Experts note that bubbles are bigger and faster than they used to be, partly because investing apps make it easy to invest. They add that novice investors are often drawn to the market via social media posts about investing. These posts are often irrelevant to the novice’s goals—so if she doesn’t do extra research, she may risk more than she can afford to lose.
However, the Internet may also have made us less susceptible to bubbles. Experts explain that we’re now better at filtering out irrelevant information—so long-term investors may be better at ignoring what short-term investors are doing. Furthermore, as personalization algorithms dominate news apps and social media, we encounter mostly information we already care about. If you’re not interested in investing to begin with, you may be less likely to encounter information about a developing bubble and thus less likely to fall for one.
To avoid a similar fate, Housel argues, you must be consciously aware of your financial goals so that you can pay attention to the right information. One strategy Housel recommends is to write a mission statement for your finances. Ask yourself: How long are you going to invest your money? What do you think is going to happen over that time? What risks are you willing to take?
(Shortform note: The questions Housel recommends to discover your financial goals focus mostly on your investments. But how can you pay attention to the right information in other areas of your life? Consider writing a financial mission statement that encompasses not just investing but other areas of your life.)
Once you discover your financial goals, Housel contends, you’ll have a far easier time ignoring irrelevant information. Instead, you’ll pay attention only to information that’s relevant to your financial goals—and as such, you’ll make better decisions as you pursue them.
(Shortform note: Paying attention to only relevant information may improve your decisions—but not if you pay attention to too much. In Smarter Faster Better, productivity expert Charles Duhigg posits that we may grow overwhelmed by the amount of data available and stop taking it in. To prevent this, the author recommends acting on the data you encounter—like writing it out by hand.)
Maintaining your financial success isn’t just about understanding what information matters to you; it's also about understanding the power of information in general. In Chapter 18, Housel posits that stories drive our decisions more effectively than statistics—so if you fall for an incorrect story, you're prone to making poor financial decisions. Therefore, Housel warns, you must be careful what stories you believe about money.
To illustrate how stories affect our financial decisions more than objective factors—like our ability to grow wealth—Housel points to how the United States’ economic situation differed between 2007 and 2009. Many of the seemingly objective factors were better in 2009 than in 2007: We had and were capable of more thanks to things like advancements in technology. But 2009's economy was far worse than 2007's because, according to Housel, we were reacting to a different story. In 2007, we believed that housing prices would keep rising; by 2009, we were experiencing the fallout that occurred when people stopped believing that story.
How Stories Affect the Objective Factors That Matter
Housel uses the same story about the difference between the United States’ economic situation in 2009 and 2007 to begin a 2017 report that describes the power stories have to affect our financial decisions. Many sections of the report are practically identical to sections of his book. However, Housel makes one key claim in this report that he doesn’t mention in his book: He argues that every economic asset, like a career or a company’s value, depends on both its actual ability to deliver value and how much people believe in that ability—and that the second factor influences the first. For example, he notes, people believe that Amazon will drive technological change, so top engineers flock to Amazon—and so, Amazon has the talent it needs to drive technological change. In other words, stories may affect our financial decisions more than objective factors, but the stories can change those objective factors, too.
How, exactly, does falling for an incorrect story worsen your financial decisions? Housel posits that there are two main reasons.
#1: The more you want something to be true, the more likely you are to make financial decisions as if that thing is true—and the more you’ll risk your financial health.
Housel argues that in any high-stakes situation where you have little control, like investing, your desire for a story to be true often drives you to behave as if that story is true—no matter how improbable. But if the story isn’t true, acting on it can have detrimental financial effects. For example, in 2021, many people lost their life savings in the volatile cryptocurrency market: They wanted cryptocurrency to make them money, so they believed it definitely would make them money.
(Shortform note: If you’re desperate for something to be true, you might also increase your belief in it by surrounding yourself with people who believe the same thing you do—which is easier than ever thanks to the ability to connect to various niche groups online. And if everybody around you is doing something, it’s far easier for you to convince yourself to do it too.)
Housel contends that when you’re planning for the future, you’re emotionally invested, and that makes you highly susceptible to attractive stories. The more you want something to be true, the more evidence you’ll find to support your opinion—so the more likely you are to become too convinced that an improbable financial future will definitely occur. And if you do, the margin of safety you build into your financial plan might not encompass what happens at all.
(Shortform note: To avoid such a fate, consider following Taleb’s strategy in The Black Swan of “negative empiricism”: the process of seeking out information that disproves your original belief. By doing so, the less likely you may be to become too convinced of an improbable financial future, and the more margin of safety you’ll build into your financial plan.)
#2: Stories make you confident that you have control when you don’t.
According to Housel, we often don’t realize we don’t understand a situation we’re in. This is because, as Housel notes, we create a reasonable explanation that makes sense to us, and we never think to question it. For example, you may see an old man sitting alone on your commute every day, assume he’s on his way to his job, and feel bad that he’s unable to retire. However, he might actually be financially independent and on his way to yoga at his gym—but you never question the story you created, so you never realize it’s wrong.
Housel posits that we make up explanations because it makes us feel like our chaotic world is more predictable and controllable than it is. For example, Housel notes, we continue to pay attention to market forecasts—even though investors generally agree they’re useless—because it’s comforting to believe that the smart person on TV knows what’s going to happen to your money.
(Shortform note: In The Black Swan, Taleb suggests a biological reason we narrativize situations: Interpreting information makes it easier for our brains to store. For example, whereas retaining 100 randomly ordered numbers would be near impossible, retaining 100 numbers that were ordered according to a specific rule would be much easier. So when we interpret—or narrativize—we’re attempting to impose our own organizing rule on the random facts of the world.)
Unfortunately, finance isn’t as predictable or controllable as we want it to be. Since it’s subject to the whims of human emotions, it doesn’t follow easy, logical rules like science does—and so you don’t have as much control as you want over what happens to your money. When you overestimate how much control you have, you’re likely to ignore factors like chance or others’ decisions and may make poor financial decisions as a result.
For example, Housel cites how entrepreneurs are overwhelmingly—and incorrectly—confident that their success depends at least 80% on factors within their control. They underestimate critical external factors they’re not intimately aware of, like their competitors’ plans, and instead create a story of success based mostly on their own knowledge. Although Housel doesn’t explicitly state that this mistaken belief drives these entrepreneurs to make poor decisions, we can infer that it might: If you don’t think your competitors’ plans will greatly impact your ability to succeed, for example, you likely won’t pay as much attention to them as you should.
(Shortform note: Entrepreneurs may be especially prone to overestimating how much they control their success—and consequently, how likely they are to succeed—because, as one psychologist suggests, the people who become entrepreneurs tend to be more optimistic in general. After all, 96% of US businesses fail within 10 years, so to become an entrepreneur to begin with suggests that you’re more optimistic than most people—and may mean that you think you have more control over your life than the average person.)
In his postscript, Housel posits that in addition to the lessons shared above, you must also understand US economic history to know why the average American thinks about money in the way that they do. He posits that the average American is angry with the current level of economic inequality in the United States because they hold a cultural expectation that we should all make roughly the same amount. He argues that the post-war economic boom led us to this expectation—but that it also led us to develop a cavalier attitude towards debt, which in turn led us to a reality where that expectation no longer rings true.
(Shortform note: The fact that Housel focuses uses his postscript to explain the mindset of the U.S. consumer explicitly indicates that his advice is most applicable to American consumers in the U.S. market. While this is obvious within the text due to his emphasis on how compound interest works in the U.S. market, his book is advertised as sharing universal principles that apply to how people think about money, not how Americans think about money. As such, non-American readers may find this section especially frustrating, given that it doesn't provide them insight into how they might think about money, while most of the rest of the book can be extrapolated to non-American consumers.)
Housel explains that in the economic boom post-World War II, Americans developed a mindset that taking on debt to finance large purchases was not a big deal. This happened for two main reasons.
First, he explains, the government actively promoted spending in the post-war decades. After World War II, the United States faced a potential economic crisis: The nation wasn’t prepared to house or hire the 16 million veterans about to return home, and they were desperate to avoid a repeat of the recent Great Depression. To protect their economy, the government passed several measures that promoted spending—like loosening credit regulations—that also led to Americans taking on more debt than ever before.
Second, Housel notes, Americans were finally wealthy enough to buy the products they’d craved during the Great Depression and wartime. Housel argues that during the Great Depression, Americans became incredibly innovative and productive out of necessity—so by the 1950s, they had several new inventions they were good at making. This created several jobs that, coupled with the government strategies promoting spending, prompted an economic boom and increased wages. Americans used this money to buy large purchases, and because the economic boom’s increased wages helped keep the household debt-to-income ratio low, they weren’t afraid of the debts they were taking on.
(Shortform note: There was also a moral component to how Americans spent: During the Great Depression and wartime, indulgence was considered unpatriotic, but by the 1950s, the government’s strategies to promote spending included calling consumers patriotic instead. This attitude contributed to the nation’s sudden acceptance of consumer debt. Moral concerns also influenced what Americans bought: People felt more at ease buying domestic trappings, like toasters or houses, because it reduced the fear that you’d overspend and grow hedonistic.)
This economic boom also instilled within Americans a cultural expectation that you should be able to afford roughly the same lifestyle as your neighbor. Housel argues that this happened because the economic boom increased wages most for the bottom percentages of earners, which narrowed the income inequality gap and created a large middle class where most people did live an economically similar life to their neighbors. Housel argues that you could meet this expectation until about 1980. (Shortform note: This cultural expectation was fueled not just by your neighborhood but by cultural artifacts of the time, like songs and TV shows.)
However, Housel argues that after a brief economic downturn in the 1970s, the resuming economic growth wasn’t as equitable as it had been before. (Shortform note: Housel deliberately refrains from examining why it was inequitable, calling it “one of the nastiest debates in economics.”) The economy boomed as much as it had in the 1950s, but the top 1% profited far more from that boom than the average American—and thus spent far more money than the average American could afford. (Shortform note: The top 1% is a common refrain in economics—but what does that mean, exactly? In the United States, to be in the top 1% in 2017, you had to make at least $478,000, but the average income of the 1% was over $1 million.)
Unfortunately, it turned out that our expectations remained when our economic reality changed. In other words, Americans still believed that you should live like your neighbor, and they still had a cavalier attitude towards debt. So Americans who wanted to live like the 1% copied their purchases. En masse, they bought bigger houses they couldn’t always afford—which helped lead to the 2008 crisis. (Shortform note: Housel doesn’t go into great detail about how this led to the 2008 crisis—perhaps because, as we learned in the introduction, one reason he wrote this book was because of how much financial experts differed in their explanations of why the crisis happened.)
And while many governmental responses to the 2008 crisis were helpful, Housel suggests that they also further widened the already-wide income inequality gap in the United States. (Shortform note: Some researchers also suggest that the 2008 crisis itself worsened the income disparity in the United States.)
But people still expected to lead essentially the same lifestyle as their neighbor—and when they didn’t, they grew angry. Housel posits that this anger fueled political groups like the Tea Party and Occupy Wall Street.
(Shortform note: While people tend to agree that anger over how wealthy a small percentage of the population led to Occupy Wall Street, a different kind of anger appears to have fueled the initial iteration of the Tea Party. A 2010 poll found that most Tea Party members were most angry about policies they thought mostly benefited the poor instead of the middle class and the rich.)
So what now? Housel suggests that we have a popular new expectation: If you’re not born rich, there’s not much you can do about it. And since, as we’ve seen, the expectations formed by our shared economic history drive our actions long after the history that formed them no longer exists, we’ll likely see the economic effects of this expectation for years to come.
(Shortform note: Housel published his book in 2020, just as the COVID-19 pandemic changed the world. The remote work revolution that occurred in the United States as a result of that pandemic may have prompted a different new expectation: I don’t have to deal with bad jobs that are wrong for me. This, one writer argues, prompted the Great Resignation, where the number of Americans quitting their job broke records every month—and may have economic effects for years to come.)