How You Think Determines Your Wealth
In the book “The Psychology of Money,” Morgan Housel exceptionally delves into the role various human psychological aspects play when it comes to money. In the literary piece, we see Housel challenge conventional societal beliefs that society holds on matters of money management, and long-term investments. The author introduces novel concepts, asserting pertinent and intrinsic connections between money, emotion, bias, and uncertain long-term investment strategies. He challenges the conventional approach of many, where society simply perceives our relationship with money to purely be rooted in science and maths. Correspondingly, Housel challenges the commonly held sentiment that hard “work” and “merit” unaided are the solitary influences principal to one’s financial success. In a mind-opening proclamation, Housel highlights the critical role that risk and luck play in determining our financial fates. Housel emphasizes that these two, are integral in successful outcomes, add on to the compounding effect, and that one ought to pay a price to make money. The Psychology of Money” offers crucial insights into the vast impact that optimism and pessimism have on an individual’s judgment, denoting how these affect chances of success. Fundamentally, for any reader, the primary standout assertions by Housel are the pitch for a paradigm shift toward evaluating financial health via a psychological lens.
Irrespective of the detailed psychology suppositions, this publication fails to address the structural and systemic economic issues that restrict individual agency. A critical look at Housel’s perspective of psychology knowledge over financial edification can evince that his viewpoint might unintentionally minimize the significance of social inequalities and the larger economic structure in creating financial inequality which influences various financial prospects and the resultant consequences. Housel proposed that financial success is largely determined by one’s behavior rather than their financial intelligence. Undoubtedly, Housel is a market guy who comprehends the intricate dynamics of investing and remains fascinated with behavioral finance as the rationale behind market fluctuations and company expansion. In a nutshell, Housel ascribes to the school of thought that dispels convectional beliefs that our relationship with money is based on science or math, rather claims it is based on dopamine and cortisol, fear and greed, pride, and envy, and social comparisons, or, in other words, our relationship with money is psychological.
Housel separates the book into 20 different lessons, each highlighting the mainstream investors’ mindset of dealing with money facing various conditions and how successful people differ in behaving from what’s seemingly right to gain a profit. Among all the lessons, I find that “Save Money” and “You and Me” resonate with me the most because while I am still early into my finance career and have been exposed to finance for less than four years, I got a taste on the power of saving money and making independent judgment already.
In the lesson “Save Money”, Housel preaches that keeping a fair amount of savings in the pocket is essential to well-being and building wealth. He added, “Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.” Indeed, saving money in our pocket gives us flexibility, and the option to make decisions when we want to. We will also feel more confident during the downturn if we still have something left in the tank that isn’t determined by external influences compared to those who spent their entire paycheck on existential needs. When we encounter something unpredictable events that exhaust our wealth, saving gives us the ability to wait and the opportunity to pounce when the situation flips. As a student majoring in Finance, I deeply feel how this notion of unpredictability applies in the capital market, in which volatility affecting the price is ubiquitous. Every day, price movements react to market news promptly. An announcement on a company launching a captivating new product minutes ago could drive up the company’s share price substantially, while the retirement of the CEO or other significant changes internal to the company could have a huge impact on its price as well. As a normal investor, it is hard to predict the release of this information. Therefore, if you don’t react fast enough, you will lose the opportunity to profit or even incur loss. As for insiders, even if they could preempt by obtaining advanced information beforehand, there is always something that nobody can predict. For example, suppose you are placing yourself on Feb 19, 2020; no matter how well-informed you are, you will undoubtedly have no idea that tomorrow will mark the onset of one of the biggest stock crashes in history, which would last almost two months. Thereby one should save a portion of money for backup no matter how smart, how reactive, and how informative you are, in preparation for the most unpredictable events that could happen in time. This lesson on the importance of saving underscores Housel’s thesis that our financial health is more deeply rooted in psychological awareness than mere numerical acumen. It highlights how understanding our emotional responses to unexpected financial events is crucial for building a resilient and adaptable financial strategy, ultimately leading to financial stability.
I also engage in stock investing currently. I do not intend to brag or commend myself on how I interacted with the market or how much I have capitalized so far. I am just here to acknowledge the practicality of refraining from investing all the money in the pocket into the stock market, especially during an alluring bull market. The market this year has been dominated by the theme of AI, which has been the strongest force driving the market up. Nvidia, the company with the most market cap in the AI industry, was up more than 80% in its share price since January. As theorized in Housel’s assertions, the need for emotional discipline, continuous learning, and long-term perspectives proves beneficial in cases where volatility is the order of the day. Despite the bubble building up since last November becoming more and more evident, many investors still could not resist the temptation of such huge upside potential, investing, or even entering into multifold leverage, most or all of their savings into these “trending stocks.” However, if the bubble blows up, or the price becomes extremely volatile as if out of control, people who own uninvested balance could have the opportunity to purchase more shares to even out the loss, a notion called “bottom fishing” (Ganti, 2022). With crucial reference to Housel’s arguments of the need to focus on quality investment rather than trying to outsmart the market, I only invested less than 30% of my savings into the market, which makes me feel comfortable in facing almost any unpredictable situation that could impact my current portfolio, as I have ample reserve to face new challenges. Although saving is not something new and is a common principle that most investors naturally abide by, Housel’s lesson on saving reaffirms my investing strategy in the stock market, and it becomes more evident to me that behavioral finance of consciously keeping a batch of money for backup is fundamental in managing money, and ought to stand coupled with a crucial understanding of other aspects of cultural and societal variables.
A critical assessment of Housel’s assertions notes a deficit in accounting for other aspects that play a crucial role in investment competence. Decisive to determining financial wellness and dexterity in investment are the socioeconomic facets of the individual, specifically health and employment aspects. Housel’s assertion in the book The Psychology of Money places absolute emphasis on human psychology and attitudes toward money leaving out these vital elements. The healthcare system and the nature of employment also significantly affect financial stability and well-being. The monetary burden of medical emergencies on uninsured or underinsured households illustrates the harsh realities of systemic inadequacies. As the Federal Government said, “Out-of-pocket spending for health care is a common unexpected expense that can be a substantial hardship for those without a financial cushion (Federal Reserve, 2022).” Similarly, the economy’s lack of job security and benefits exposes workers to financial precarity, challenging the notion that individual behavior alone can navigate these structural vulnerabilities. However, these are also at the mercy of additional aspects of policy adoption and implementation.
Policy interventions are essential to address financial inequality and empower individuals to achieve financial well-being. While personal financial wisdom remains valuable, it is insufficient in the face of systemic barriers. Solutions inclusive of healthcare reform, enhanced consumer protections, and initiatives to ensure equal access to financial education can provide a more equitable foundation for monetary decision-making. Going beyond, we should also remind ourselves that while these solutions will bring more equal opportunities and resources to society, they will also influence how people think in different states, the most critical factor that Housel argues. For example, if the original lower-status groups earn more money thanks to the emergence of these solutions, would they keep the same spending and saving pattern as before? Such change in the psychological state of perceiving the surplus money stands comprehensively analyzed as the precondition for introducing the policy interventions.
Housel’s literary piece is unbound in terms of the enlightenment it offers, with the second lesson from the book — You and Me — Housel critically points to the need to deliberate how societal and cultural variables can impact financial conduct. Housel argues that our environment influences our financial decisions: when we seek financial advice or share our strategies, we always ignore that different people have different goals and time horizons. Some people are short-term investors, some are long-term, some are aggressive, and some are risk-averse. Further, the same person might be all these at different times and under distinct conditions. Therefore, swaying by people who play a different game and other factors embedded in our culture can also throw off how you think you should spend your money. By emphasizing the need for independent analysis and caution towards following others’ financial advice, the author demonstrates how our psychological makeup is a crucial determinant of financial health. It illuminates the critical role of personal psychological understanding in distinguishing between what financial strategies may be suitable for us versus those tailored to the differing ambitions and risk tolerances of others.
Interestingly, cultural and societal variables have had a notable implication in my venture in the storm market venture. When I first got involved in the stock market three years ago, I had limited financial knowledge and made investment decisions based on suggestions from friends, commentary from financial advisors, and reports from news channels like CNBC. It wasn’t until my long-term P&L revealed a downward trend that I realized liberated analysis and generating personal and unique solutions are keys to success in the market. Knowing whether a stock falls under a buy signal or not from experts’ opinions is easily accessible. What they didn’t disclose to the public — how long to hold, how many you should buy during which conditions, are invaluable, and that was why many rookies, including me, screwed up initially, as they were unknowing of what to do after entering the market. I can’t agree more with Housel after paying such “tuition” to the market. This experience denotes the immense implication society has on one’s investment behavior. Indeed, you won’t remember the severity until you physically experience it. His life lesson paved the right path in my future investment by alerting me to the consequence of relying on those “shortcuts.”
Critical of Housel’s navigation of the psychological landscape of money, his exploration may inadvertently neglect the structural and systemic economic factors that significantly influence individual financial opportunities and outcomes. This oversight raises questions about the completeness of the psychological perspective in addressing the complexities of financial well-being.
Socioeconomic disparities, for example, play a critical role in shaping an individual’s financial reality. The pervasive wealth gap and systemic inequality within the economic system limit the applicability of psychological insights for those who face barriers to financial education, stable employment, and access to investment opportunities. Studies have consistently shown that individuals from lower socioeconomic backgrounds face higher barriers to financial stability, regardless of their financial knowledge or psychological acumen. For example, The Federal Reserve’s Report on the Economic Well-Being of U.S. Households highlights that “notable gaps in access to financial services still exist, particularly among persons with low-income, Black and Hispanic adults, and those with a disability (Federal Reserve, 2022)”.
Further, an accurate implication of pointing out the systematic inequality stands evidenced by the fact that while such gaps in accessing financial information seem unfair, such inequality has never been an option for Housel’s You and Me story: For people with lower socioeconomic backgrounds, the situation is that it’s not a matter of whether or not they are willing to listen, it’s the fact that many minorities and other groups such as single parents, low-income families, women, younger people, elderly on fixed incomes, white people with low educational attainment don’t have the choice to listen. They do not have the chance to choose and compare first-hand resources like the higher classes. Another important point worth mentioning is that while Housel proposes saving money to build wealth in his Saving chapter, he disregards the psychology of minority groups. He wrote a book from a standpoint that generalizes to most readers, but he failed to consider, especially in this chapter, that poor persons couldn’t even extract portions of their wealth into savings. They remain struggling with life, let alone using savings to generate money or hedge risk. In his perspective, saving is the bedrock of stability, but it’s also counterintuitive to think that saving is rarely an option for minorities or would even reduce their life quality. Therefore, it is best to conclude that Housel’s advice is valuable but has a hidden caveat.
I remain critical of Housel’s assertion that financial knowledge is not essential access to quality education and financial literacy programs play a crucial role in the ability of investors to apply an understanding of human psychology on money matters. Unfortunately, financial education is unequally dispersed, frequently along socioeconomic lines. This difference diminishes the power of psychological insights to render change in people who lack the necessary underlying knowledge to apply them. Research conducted by the FINRA Investor Education Foundation has demonstrated that variations in financial literacy levels among Americans contribute to the widening gap in financial inequality. It is not viably arguable that all these persons lack the appropriate attitudes on matters of investment, despite the common factor evident within these populations being their financial literacy. If residents have high financial literacy, they can better understand bank lending policies, insurance services, and other related financial services, bettering their attitudes towards money and enabling them access to finances to make their initial investment. Essentially, one cannot invest in what they are ignorant of and need to know more about the field(Van Rooij et al., 2011). Initiatives to improve financial literacy highlight the need to eliminate structural hurdles to provide individuals with the skills they need to make informed financial decisions. Fortunately, the process of improving financial literacy is on an ongoing basis. Talking about financial services, service providers formulate their services and programs in a way that helps people with different literacy levels to invest, making up for the disadvantage caused by their social background. For instance, many banking apps have developed features that help users understand their investments comprehensively. When they choose to invest in a product, many apps conduct risk assessment surveys beforehand to remind the investors of the risk of the underlying assets and allow them to select the best financial product/portfolio within their range of psychological endurance. In this case, reforms in literacy programs have made evident that many entities are striving to mitigate the difference in the public’s literacy level by allowing those groups of people to realize the potential of psychological insight.
In general, Housel argues that psychological insights can lead to better financial outcomes by helping individuals recognize and mitigate their biases and psychological insights while being aware of structural and systemic economic factors crucial to offering a more holistic path toward financial well-being. Recognizing the limitations of focusing solely on individual behavior, we can begin to address the broader societal and economic issues that shape financial opportunities and outcomes. A balanced approach that combines personal introspection with systemic change can pave the way for a more inclusive and equitable financial landscape.
References
Ganti, A. (2022). Bottom Fishing: What it is, how it Works. Investopedia. https://www.investopedia.com/terms/b/bottom-fishing.asp
Van Rooij et al. (2011). Financial literacy and stock market participation. J. Fin. Econ. 101, 449–472
https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000717
Federal Reserve Gov. (2022). Economic Well-Being of U.S. Households in 2022. The Federal Reserve System.
