The author Housel writes “people do some crazy things with money. But no one is crazy.” I am not sure I agree with this statement. If we do something crazy, are we not crazy? I would say yes many of us are crazy. What gets in our way of making sound decisions with money? I would argue it is our ego. We think our opinions and thoughts are the most important when it comes to money, and the truth is it is history that is the most important. If we just studied the very recent history of finance and the stock market, and then followed history, we would make sound decisions with our finances. Let’s dive into Morgan Housel’s, the author of the Psychology of Money, thoughts about this idea and more.
Morgan Housel writes that there are many contributing factors when it comes to how we handle our money. Factors like, what generation were you born in, who raised you, how rich or poor were your parents, what part of the world were you born in, what type of values did your family hold, and finally luck. He writes “a person who grows up in poverty thinks about risk and reward differently” than let’s say a millionaire. The reality is “your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.” In essence, we are not seeing reality. We are seeing our experiences projected on top of the reality of the world.
Economist Ulkrike Malmendier and Stefan Nagel in 2006 wrote about people’s willingness to invest and bear risk, for example in the stock market, is dependent on personal history. Housel sums this up perfectly, “…take stocks. If you were born in 1970, the S&P 500 increased almost 10-fold, adjusted for inflation, during your teens and 20s. That’s an amazing return. If you were born in 1950, the market went literally nowhere in your teens and 20s adjusted for inflation. Two groups of people, separated by chance of their birth year, go through life with a completely different view on how the stock market works.”
Lottery tickets are a prime example of how people from different income brackets view money. Housel writes “forty percent of Americans cannot come up with $400 in an emergency.” And yet in the United States the lowest-income households spend approximately $412 a year in lotto tickets. This sounds crazy, right? One could argue that it would make a lot more sense to save that $412 in a savings account or the stock market … at least that way you would have some return. Housel asks us to put ourselves in the shoes of the low-income lottery ticket buyer. When you are living paycheck to paycheck many things seems out of reach, Housel argues, and buying lotto tickets, at least for a moment, gives a person access to the dream of great finances. I can kind of relate to this. At times when my finances didn’t seem that great, many times I would make an even worse decision. Why is this? Again, I would argue it is because of our ego. We double down on bad decisions because we don’t want to admit we are wrong; and we don’t want to admit someone might know better than us. There are many financial advisors out there giving away free advice, and yet many of us do not listen.
It is true that “few people make financial decisions purely with a spreadsheet.” Housel writes that we should not judge ourselves too harshly because the idea of investing is relatively new to us. “Before World War II most Americans worked until they died.” Saving and investing wasn’t even a concept back then. To put it into perspective “the 401-K — the backbone savings vehicle of American retirement — did not exist until 1978.” So maybe, many of us are not crazy with money, we just don’t have enough experience to make sound decisions. I think the author, Housel, is letting us off too easily. I appreciate his kindness and generosity with his ideas, but I still feel we have enough financial history to make sounds money decisions in this day and age. Read more of my book reviews in the weeks to come, and more thoughts on The Psychology of Money; and maybe we can be persuaded by Housel.
