📚: The Psychology of Money, Morgan Housel

I can’t endorse The Psychology of Money. Though some of its theses resonate, they were fairly obvious, nothing really insightful. However, some parts bother me. If you don’t know much about personal finances, you might find it informative (though I’d prefer A Random Walk Down Wallstreet or Common Sense on Mutual Funds); otherwise, skip it.

Ideas that I found fairly obvious: compounding is powerful; luck plays a huge part in life; saving matters; the biggest reason to be wealthy is to buy freedom.

I take issue with a bad explanation from chapter 20, Confessions. The author mentions keeping a significant percentage of their savings —20%, though not accounting for their home— in cash. They do this in order to be ready for an eventual unexpected huge expense. That way, they won’t “be forced to sell stocks”. The author presents this as way to make sure they won’t have to “interfere with compounding” (ref).

If you are that risk averse, holding cash makes perfect sense. But the author’s explanation doesn’t. If you invest that money and let it compound, you can sell exactly that portion of your portfolio when the unexpected expense comes; you won’t interrupt compounding for the remainder of your portfolio. Said differently, the author has already interrupted compounding: by keeping so much cash, compounding is not even allowed to start (for that portion of their wealth).

The only sensible argument is fear of a significant market downturn. If the expense does coincide with such a downturn, you will have to sell more than you wanted. So say that! Don’t give us this strained “don’t interfere with compounding” rationale. Per Peter Lynch, “far more money has been lost by investors preparing for or trying to anticipate market corrections than has been lost in the actual corrections themselves.” The author isn’t timing markets, but it’s still paying a significant premium in preparation for the unavoidable correction.

I also took issue with chapter 11 —Reasonable > Rational. Housel encourages us to aim for “reasonable”, rather than “rational”. Though there’s nuance (what exactly do we mean by “rationally”?), but I don’t find the framing useful. It feels a bit like saying: “science won’t ever be fully sure of its knowledge; therefore don’t aim for that, just be reasonable”.

Housel is twisting the term “rationality” far from its commonly accepted meaning, at least in rationality circles like LessWrong. We will always have our emotions, which we must acknowledge, and we should therefore find mechanisms to act accordingly. But rationality must remain our north star.

For example, this chapter contrasts “the mathematically optimal strategy” with “the strategy that maximizes for how well you sleep at night”, as if they were different things. Obviously, a mathematically optimal strategy should cover a large spread of possible scenarios, not just the expected return. But how could I maximize for sleep quality other than by choosing the mathematically optimal strategy, which is based on my expected emotions?

And this isn’t just nuance: the author presents their ideas on what to do when you have a fever, which… are about the exact opposite of what I do!

In conclusion, I found nothing new in this book, and I disagree somewhat with a few parts.

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