Money is much more about human behavior than logic and data.
It offers valuable clues into the intricate web of emotions, biases, and instincts that shape our relationship with money. When we understand this, we can manage our money better.
One of my favorite writers on this topic is Morgan Housel, the author of The Psychology of Money, who joined me for one of the most popular podcast episodes I’ve ever done (🎧Ep 6).
So let’s dive into what I learned from Morgan so you can learn how to leverage the behavioral side of finance to get smarter about money and investing.
💰 Money is Behavioral
When Morgan started writing during the market crash of 2008, he was very curious as to why people made strange money decisions.
To figure this out, he didn’t just study finance; he also looked at psychology, sociology, biology, and other areas to understand how people respond to fear, greed, risk, and uncertainty in the context of money.
While it may seem obvious to you, teaching from the lens of behavior is contrary to how finance has historically been taught. Schools typically focus on formulas, data, and charts, not the softer, behavioral side.
But money is emotional.
Educating people about how to respond to greed and fear is much closer to learning how to be a good spouse - essential but not easily summarized into a formula or tested on a midterm.
This was the catalyst for his book – to help people learn about money in a way that aligns with how it works in real life.
🪙 The Ultimate Wealth
The highest form of wealth isn’t measured in material possessions or luxurious experiences.
It’s the ability to wake up every morning and decide how to spend your day on your terms. The power to choose when, where, and how you work, with a sense of independence and autonomy, permeates every aspect of your life.
It’s the kind of freedom that brings lasting happiness (or at least less misery). While cars and homes may initially bring joy, this fades over time, and they become part of the norm.
Imagine having the security to pursue your dream job instead of seeking the first opportunity. Or the peace of mind that comes with a financial safety net for unexpected emergencies.
Every small step toward greater control is one step closer to the ultimate wealth.
💵 Cash Offers Freedom
One powerful tool for achieving freedom is having cash on hand when you need it most.
While having cash readily available may not be as thrilling as the stock market, it's a bit like a superpower. It empowers you to do things like turn down undesirable job offers, raise your insurance deductibles, or prevent you from panicking in market downturns.
People often underestimate the value of cash until they find themselves in a situation where they desperately need it. In those moments, it becomes evident that cash is the oxygen of independence, enabling you to breathe freely when life’s circumstances take an unexpected turn.
Fortunately, with high interest rates right now, keeping money in cash is not just tolerable but a pretty compelling place to get a return. However, when rates eventually drop again, don't forget the value of keeping some cash on hand.
📈 The Allure of More
The desire for more is deeply ingrained in human nature.
It's entirely natural to aspire to improve our lives and attain higher levels of comfort and security. This aspiration often extends to wanting to impress those around us—friends, coworkers, and potential romantic partners—by showcasing our possessions or achievements. We seek validation and recognition, and it's tempting to believe that acquiring more will earn us that approval.
Yet, this pursuit can quickly become a double-edged sword. No matter how much we earn or accumulate, someone else always seems to have more. And it becomes a game of comparison.
And this never-ending game of “keeping up with the Joneses” can lead to a sense of dissatisfaction and anxiety. I've seen countless friends aspire to hit a certain wealth or net worth target only to raise the bar every time they hit it and setting their sights higher on vacations, homes, cars and more.
From all my experience, it seems like the allure of more can sometimes lead to less overall happiness and contentment. It can divert our focus from what truly matters; things like meaningful relationships, personal growth, and experiences that can bring genuine fulfillment.
⚖️ Saving vs. Earning
It’s hard for many to save more and spend less.
Most people focus on earning more to build wealth, but the ability to lower expenses and save is something you can directly control. One is not more important than the other; it’s simply realizing that changing spending habits can move the needle more for most people.
That said, going to extremes with frugality isn’t healthy (believe me, I know from experience haha). Even if you can survive spending so much less, your friends and family may struggle to relate or even reject that lifestyle. While saving more might accelerate your path to financial independence, it’s also crucial to remember the value of life experiences and relationships. I covered this topic in depth in my post on Net Fulfillment Over Net Worth.
A balanced approach to financial freedom ensures you don’t miss out on enjoying life while securing your financial future.
📉 Trying to Beat the Market
Some people are drawn to active investing (e.g. picking stocks) because they think they can beat the odds.
But luck plays a much bigger role than talent. Over the last 10 years, the number of active managers outperforming the market is less than 7%. How can an individual who doesn’t spend all their time actively researching the market be successful in the long term?
The market is the market - it’s tough to beat.
My former boss and legendary investor, Andy Rachleff (🎧Ep. 19), always preached, "Good investing should be boring." I wrote about this in a past newsletter, All About Investing Part 1.
That said, boring is still boring. It’s perfectly natural to want to scratch the itch of active investing. So it's reasonable to play with a tiny portion of your portfolio, but I always try to keep it at ~5%-10% of a portfolio.
📚 Experiencing Risk & Learning from History
Assessing your risk tolerance is challenging until you've truly experienced a big drop in your portfolio. These major financial events and market crashes (e.g., 2008 crisis and COVID-19) can trigger unexpected emotions. For example, it’s easy to say you'd be buying more as the market drops on a questionnaire, but pulling the trigger after consecutive days of big declines is much harder at the moment.
I got to see this first hand during the Covid-19 market crash. Many friends of mine who previously said they'd buy more during a a big drop found themselves selling out of fear of an even bigger correction and then really struggled to get back in when the market quickly recovered.
But assuming you can learn the right lessons from history might not always work as you planned. As Morgan put it, “Investors don’t learn from history; it’s that they’ve learned too precise a lesson from history.” Precise lessons will not teach you much about the future because the biggest events that will shift the rest of our lives are surprises no one else can predict.
Instead, we should be focusing on broader insights about human behavior when looking back in time and if there's one big takeaway, it's just that the world is always surprising.
🏆 Characteristics of a Successful Investor
Even successful investors make wrong choices sometimes.
Renowned investor Benjamin Graham knew you only need a few outsized returns to make all the difference. Consistent success doesn’t always rely on being right but on managing risks effectively and avoiding catastrophic failures.
Making the “right” decision is not based on the outcome of the action.
Here are three characteristics he shared about successful investors
- Patience: Successful investors must be patient and willing to endure short-term fluctuations. Compound interest (with time) is how to grow wealth.
- Make enough bets: Some investments are big winners, so having exposure to multiple opportunities and staying in the game increases the likelihood of finding investments that yield significant returns.
- Accept imperfection: Don’t be too harsh on yourself. We only know one version of history—the one that happened—and the future is full of uncertainties and surprises.
Making the “right” decision based on the information available at the time should be appreciated, even if outcomes differ from expectations.
🪞 The Most Essential Part of Finance
Morgan believes the most essential part of behavioral finance (maybe one of the most overlooked) is to know yourself.
Become introspective about who you are.
Everyone is different, so you have to be honest about your skills, weaknesses, how you deal with risk, and what you want in life – and not just read about other people or other people’s situations. Knowing yourself is the only way you can understand and master the behavioral side of finance.
📚 Read more of Morgan’s Work
I’d be remiss if I didn’t share some of Morgan’s amazing work.
- Check out his book The Psychology of Money
- Read his work on the Collab Fund blog
- Follow him on Twitter/X
🎙️ Energy Savings and Home Automation
Today, I released a podcast episode on saving money and time with a smarter and more energy efficient home.
I spoke with Matt Ferrell, a lifelong tech enthusiast and one of the most knowledgeable people I've ever met on the topic. He produces incredible content for his show Undecided, where he explores how smart and sustainable technology can impact our lives for the better. He also hosts the Still To Be Determined podcast.
If you want to learn to make your home smarter and more efficient, ultimately saving you time and money, then you’ll love this episode.
💭 Parting Thoughts
I hope this helps you reframe money in a new light. Seeing it as behavioral will help you understand how it works and enable you to hack your mind to be a more rational, reasonable investor, saver, earner, and spender.
If you have any unique tips or hacks you use for investing, saving, or finance in general, please let me know by emailing podcast@allthehacks.com!
And if you enjoyed this, two requests:
- Please share this blog post with a friend, colleague, or family member who might find it valuable
- Check out these two posts on investing: Part 1 and Part 2.
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