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The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

Reading Time: 8 minutes

Psychology of Money Book Cover

In the Psychology of Money, Morgan Housel teaches you how to have a better relationship with money and to make smarter financial decisions. Instead of pretending that humans are ROI-optimizing machines, he shows you how your psychology can work for and against you.

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Key Takeaways

Theory isn’t reality.

“The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.” Resurfaced using Readwise

We are not spreadsheets. As much as reading can inform us about what has happened in the past, like stock market crashes or how stocks have trended up and to the right over time, learning about something in a book is very different from actually experiencing the event. So be careful. You may think that you can hold your stocks during a 30% market downturn because you know that only suckers sell at the bottom, but it’s only when you experience that type of downturn that you’ll learn what you’ll do.

Luck and risk

It’s easy to convince yourself that your financial outcomes are determined entirely by the quality of your decisions and actions, but that’s not always the case. You can make good decisions that lead to poor financial outcomes. And you can make bad decisions that lead to good financial outcomes. You have to account for the role of luck and risk.

To mitigate the risk of overweighting the role of individual effort in determining outcomes:

  • Be cautious about the people who you admire and look down upon. Those at the top may have been the benefactors of luck while those at the bottom may have been the victims of risk.
  • Focus less on individuals, and turn your mind to broader patterns. It’s difficult to replicate the outcomes of successful individuals, but you may be able to participate in broader patterns.
“But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.”

Be kind to yourself when you make a mistake or end up on the wrong side of risk. The world is uncertain, and it may not be your fault if something goes wrong.

Lessons from Buffet

“There is no reason to risk what you have and need for what you don’t have and don’t need. – Warren Buffet Resurfaced using Readwise

It’s easy to have a goalpost that keeps moving. Once you achieve your goals, you look toward the next goal. And the cycle never ends. This is often driven by comparing yourself to others, and you’re often comparing yourself to someone who is above you in the ladder that you benchmark yourself against.

When it comes to money, someone will always have more of it than you. That’s okay. It’s fine to pursue more money, but don’t start making risky bets that put what you have at risk for something that you don’t need.

“As I write this Warren Buffet’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.”

Compounding is deceptively powerful.

Getting money vs. keeping money

“Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.” Resurfaced using Readwise

Getting money and keeping money are two distinct skills. While getting money necessitates risk taking, hard word, and an optimistic disposition, keeping money is a different skill. It requires you to mitigate risk, avoid getting greedy, and to remember that things can be taken from you at any moment.

Cash is not the enemy

“A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality” Resurfaced using Readwise

If you’re relatively young and earn more than you spend, the best way to optimize your long-term investment returns is to invest the majority of your money into a diversified portfolio of low-cost index funds. Holding more than a few percentage points of your net worth in cash is silly because the value of cash erodes with inflation, and that cash can otherwise be put into assets like stocks that historically have compounded at a rate of 6-7%.

While it’s an alluring prospect to invest in ways that maximize your returns, these theories often don’t account for you psychology. Imagine you’re 95% invested in stocks and have 5% in cash. The market declines 20-25%. Depending on how that crash affects your psychology, having such a small percentage in cash may make you more likely to panic sell some of your stocks during that downturn. And that panic sell may lead to you missing out on far more returns than if you had held a larger percentage of your portfolio in cash and didn’t sell because you felt more secure.

This actually happened to me during the March 2020 downturn. Being too invested with low cash reserves led me to panic sell some of my portfolio, and it was a financially and psychologically costly mistake as we saw one of the fastest market reversals in history. And it led me to re-evaluate my theory of investing .

Humans are not spreadsheets!0 So even if the models say that you maximize returns by being only 1-5% in cash, you might actually hold 10-20% in cash to protect yourself from your psychology when things go poorly. And if this larger cash reserve saves you from one making one big financial mistake, it might be the best move for your portfolio.

“Long tails – the farthest ends of a distribution of outcomes – have tremendous influence in finance, where a small number of events can account for the majority of outcomes.” Resurfaced using Readwise

The investment decisions you make on 99% of days don’t matter. It’s the decisions you make on a small number of days when something big is happening – a massive downturn, a frothy market, a speculative bubble, etc. – that make all the difference. Warren Buffet has owned 400 to 500 stocks during his life. He’s made the majority of his money on 10 of them.

Highest form of wealth

“The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.” Resurfaced using Readwise

Having more flexibility and control over your time is far more valuable than getting another 2% on your returns by working all-nighters or making speculative bets that impact your sleep.

Ferraris don’t generate respect

People buy mansions and fancy cars because they want respect and admiration from others. What they don’t realize is that people don’t admire the person with the fancy house or car ; they admire the object and think of themselves having that object. So buying impressive items to gain admiration and respect from others is a fool’s pursuit – these things can not be bought.

Being rich vs. wealthy

If you’re rich, you have a high current income. But being wealthy is something different – wealth is not visible. It’s the money that you have that’s not spent. It’s the optionality to buy or do something at a future time. Being rich offers you opportunities in the short-term, but being wealthy provides you the flexibility of having more of the items you want – freedom, time, possessions – in the future.

What’s the optimal portfolio?

The optimal portfolio is one that allows you to sleep at night. It allows you to generate reasonable returns, while also maximizing your quality of life and control over your life. It will stand the test of tough recessions and other blips in the road. Most academic understandings of the ideal portfolio ignore the very real human factors that come into play and that may cause you to deviate from the strategy.

Leave room for error

If you want to be in the game for the long run, you need to leave room for error. “Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor.”

A big gap in most people’s understanding of room for error is accepting that there is a difference between what you can technically endure vs. what you can emotionally endure.

For example, maybe you have enough money saved up to last you two years. So maybe you quit your job to pursue your dreams, assuming that you can always get a job when you get closer to $0 in savings. Technically, you can do this, and you won’t even be in debt. But perhaps emotionally, you start getting nervous after you’ve burned 30% of your savings, and all of a sudden you’re depleted psychologically. If that’s the case, you may ditch your dreams and go back to a day job even if you had another year+ in financial runway.

So if you don’t account for your emotions in your models, you may end up in suboptimal situations.

The difficulty of long-term financial planning

As humans, we tend to underestimate how much our personality and goals will change with time. This makes long-term financial planning hard. We may think we’ll never have kids or a big house when we’re young, so we plan as if that’s the case, but then we find ourselves with a house and kids that the plan didn’t account for. So when thinking about your investment strategy, try to account for the unknown.

The price of investing

“Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret – all of which are easy to overlook until you’re dealing with them in real time.” Resurfaced using Readwise

If you choose to invest and try to compound your wealth, there is a price. And that price is often hidden – it’s the ups and downs of Mr. Market that take you on a ride. It’s the uncertainty and fear that pop into your mind from time to time, as market conditions and your personal conditions change. You have to be willing to pay that price if you want to invest, especially if you’re very active with your strategy. The only way to deal with this market fee is to accept that it exists and to be willing to pay the price. You need to be prepared to deal with the volatility and uncertainty. It’s a part of the game you’re playing.

What game are you playing?

“Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.” Resurfaced using Readwise

If you have a buddy who’s making lots of money trading short-term options and you start getting FOMO and want to play that game, you really need to consider if that aligns with your goals. If you have a 20-year time horizon and like the simple nature of passive investing, it would be stupid for you to start playing your buddy’s game. You may be able to profit, but at what cost? Know the game you’re playing, and know the game others around you are playing as they tell you about their latest tactics.

Pessimism is persuasive

Pessimism often sounds smarter and more persuasive than optimism. If something is not going well, it’s easy to think that it will continue not going well. And that sounds very plausible. But what this line of thinking misses is that problems often create demand for change and solutions. And this leads to ingenuity that creates changes that only the optimist might believe in.

The problem with hindsight

When we look back at the past, we create stories about why certain things happened. And those stories make us think that the world is understandable and makes sense in some way.

The problem is that these stories may be complete nonsense. What happened may have been completely random, yet our stories delude us into thinking that there is some lesson we can learn to better predict the future.

Avoid the illusion that you have full control in the uncertain world in which we live.

Investment results

  • If you evaluate how well you’ve done by focusing on your individual investments, versus your entire portfolio, you’ll overestimate the brilliance of your winners and feel too much regret about your losers.
  • Good decisions are not always rational. Sometimes, you have to consider that you’re an emotional creature that may have different needs than an ROI-optimizing model may suggest.
  • If you can do everything you want without trying to outperform the market, then why try to outperform the market and endure the price tag that this pursuit requires?

If you want to discover more great books...

  • Explore the best books for expanding your mind, the best self-help books, the best philosophy books for beginners, books for people who don't enjoy reading, and more great books .
  • Check out Foundations. Foundations is a searchable digital notebook built for curious, lifelong learners. It will help you accelerate your learning, solve hard problems, and save time by giving you access to a growing digital collection of insights from timeless books.

You might also enjoy these books...

  • Same as Ever: A Guide to What Never Changes by Morgan Housel
  • How to Get Rich by Felix Dennis
  • The Body Keeps the Score: Brain, Mind, and Body in the Healing of Trauma by Bessel Van Der Kolk
  • Rich Dad Poor Dad by Robert Kiyosaki
  • Wanting: The Power of Mimetic Desire in Everyday Life by Luke Burgis
  • How to Stop Worrying and Start Living by Dale Carnegie
  • Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Taleb
  • Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts by Annie Duke
  • The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution
  • Radical Acceptance: Embracing Your Life With the Heart of a Buddha by Tara Brach

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Money Masterpiece

Your Financial Partner

The Psychology of Money: Lessons and Perspectives

Money, often perceived as a mere numerical entity, is, in reality, a dance between the cold arithmetic of spreadsheets and the complex emotions of human nature. In his book, “The Psychology of Money,” Morgan Housel unravels the intricate relationship between financial decisions and the intricate fabric of our lives. In this exploration, we’ll dissect key lessons from the book through the lenses of personal finance and productivity.

Table of Contents

Lessons and Perspectives

Financial dna: unraveling personal histories.

Our financial decisions are deeply rooted in our unique life experiences, forming our financial DNA. Housel emphasizes how events like stock market movements and inflation during our formative years shape our attitudes towards money. Understanding this, we can appreciate that people aren’t inherently “crazy” with their financial decisions; rather, they are navigating the world based on their personal life experiences and worldview.

Resource Recommendation: “The Psychology of Money” by Morgan Housel

Compound Kings: The Power of Early Investing

Warren Buffett’s journey is a testament to the power of compounding. Starting to invest at a young age allowed him to harness the magic of compounding over time. This highlights the counterintuitive nature of compounding, where small, consistent investments can lead to substantial wealth. The lesson here is clear: start early, be consistent, and let time work its compounding magic.

Resource Recommendation: “The Essays of Warren Buffett” by Warren Buffett

Pessimism & Money: Balancing Realism and Optimism

Our inclination towards pessimism in financial matters is explored by Housel. While bad news tends to grab attention, the slow progress and positive changes over time often go unnoticed. Recognizing this bias is crucial for making sound financial decisions. It’s about striking a balance between being realistic about challenges and maintaining optimism about the gradual improvements that unfold over time.

Two Forgotten Elements: Luck and Risk

Success is a complex interplay of talent, luck, and risk. Housel illustrates this through the story of Bill Gates, Paul Allen, and Kent Evans. While Gates and Allen had exceptional talent and a unique advantage, Evans faced an unfortunate tail event. Understanding the role of luck and risk in financial decisions fosters humility and a broader perspective. It’s a reminder that success is a combination of factors, and acknowledging this complexity is key.

The Key to Happiness: Controlling Your Time

The pursuit of wealth often intertwines with the desire for happiness. Housel suggests that the true key to happiness lies in having control over your time. While financial success is a goal for many, it should not come at the expense of losing control over your life. This lesson emphasizes the importance of aligning financial pursuits with the ability to lead a fulfilling and balanced life.

Tail Events: Embracing the Unpredictable

Housel introduces the concept of long tails, where a small number of events can account for the majority of outcomes. Understanding and embracing the unpredictable nature of tail events is vital, especially in investing. The examples of art collecting, venture capital, and business highlight how a few outlier events can significantly impact overall success.

Resource Recommendation: “Fooled by Randomness” by Nassim Nicholas Taleb

Beyond Bling: True Wealth vs. Being Rich

Distinguishing between being rich and being wealthy is a crucial lesson. True wealth lies in financial assets yet to be spent, emphasizing the importance of self-control and restraint. Accumulating wealth isn’t about showcasing possessions but about building assets and making prudent investment decisions for the future.

The Real Price: Accepting the Uncertainty

Investing, like climbing a mountain, comes with inherent uncertainty and risk. Recognizing and accepting the emotional price of volatility is crucial. Housel compares investing to buying a car, highlighting the need to pay the price, whether in dollars or emotions, for the potential rewards. Understanding that success in investing requires enduring the challenges is essential for a fruitful journey.

Hedonic Treadmills: Knowing When Enough Is Enough

The concept of Hedonic Adaptation warns against the never-ending pursuit of goals without recognizing when enough is enough. The examples of Bernie Madoff and Gupta emphasize that unlimited wealth doesn’t guarantee happiness. Knowing when to stop and finding contentment along the way is crucial for a balanced and fulfilling life.

Resource Recommendations

Before we delve into the detailed implementation of these lessons, let’s explore some additional resources that can complement and deepen your understanding of personal finance and productivity:

  • This book offers a transformative approach to money and life. It encourages readers to examine their relationship with money, align their spending with their values, and achieve financial independence.
  • James Clear explores the science of habit formation, providing actionable insights into building good habits and breaking bad ones. Understanding habits is crucial for maintaining consistent financial practices and increasing productivity.
  • The authors analyze the habits and characteristics of millionaires, debunking common myths and providing practical advice on accumulating wealth. It’s a valuable resource for understanding the mindset of successful individuals.

Now, let’s dive into the practical application of the lessons from “The Psychology of Money.”

Implementation of Lessons

  • Reflect on your personal experiences with money. Identify any biases or beliefs that may be influencing your financial decisions. Understanding your financial DNA is the first step towards making intentional and informed choices.
  • Encourage individuals to start investing early, even with small amounts. Emphasize the power of compounding and how consistent contributions over time can lead to significant wealth accumulation. Recommend resources on beginner-friendly investment strategies.
  • Educate individuals about the bias towards pessimism in financial matters. Highlight the importance of staying informed while maintaining a realistic but optimistic outlook on long-term financial trends. Share success stories that emphasize gradual improvements.
  • Discuss the interconnectedness of talent, luck, and risk in financial success. Encourage humility by recognizing that external factors play a role in one’s financial journey. Foster a mindset that embraces uncertainty while making informed decisions.
  • Guide individuals to assess their priorities. Help them understand that the pursuit of material wealth, without control over one’s time, may lead to dissatisfaction. Provide tools and strategies for achieving a balance between financial goals and personal well-being.
  • Explain the concept of long tails in investing. Encourage a diversified investment approach that acknowledges the potential impact of outlier events. Share case studies or examples where a small number of investments significantly influenced overall returns.
  • Emphasize the importance of building financial assets for the future. Challenge the notion that visible possessions equate to true wealth. Provide guidance on saving, investing, and making decisions that contribute to long-term financial well-being.
  • Prepare individuals for the emotional challenges of investing. Share stories of successful investors who endured market volatility. Highlight the importance of patience and long-term thinking. Recommend resources on managing investment-related stress and anxiety.
  • Discuss the concept of Hedonic Adaptation. Encourage individuals to define their financial goals clearly and recognize when they’ve achieved them. Promote contentment and mindfulness in financial decision-making, preventing the endless pursuit of unattainable goals.

As personal finance advisors and productivity coaches, understanding the psychology of money is paramount. Morgan Housel’s insights provide a roadmap for navigating the intricate dance between financial decisions and human nature. By applying these lessons, we can guide individuals toward intentional financial choices, fostering a harmonious relationship between wealth and well-being.

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| The Art of Living for Students of Life

18 Wealth Lessons from “The Psychology of Money” by Morgan Housel (Book Summary)

By Kyle Kowalski · 2 Comments

This is a book summary of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel.

I couldn’t ignore The Psychology of Money any longer. It seems like everyone is talking about it in my little corner of Twitter. Many are calling it their top book of the year.

And, Amazon supports the hype. The book launched in September 2020 and already has over 2,500 ratings.

The Psychology of Money Book

If you’re looking for an intro to Morgan Housel, here you go:

Quick Housekeeping:

  • All quotes are from the author, Morgan Housel, unless otherwise stated.
  • I’ve added my own emphasis in bold .

Book Summary Contents: Click a link here to jump to a section below

  • No One’s Crazy
  • Luck & Risk
  • Never Enough
  • Confounding Compounding
  • Getting Wealthy vs. Staying Wealthy
  • Tails, You Win
  • Man in the Car Paradox
  • Wealth is What You Don’t See
  • Reasonable > Rational
  • Room for Error
  • You’ll Change
  • Nothing’s Free
  • You & Me
  • The Seduction of Pessimism
  • When You’ll Believe Anything

The Psychology of Money by Morgan Housel

Overview of The Psychology of Money :

“The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave .”

  • “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know . I call this soft skill the psychology of money .”
  • “The aim of this book is to use short stories to convince you that soft skills are more important than the technical side of money .”
  • “We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance) .”
  • “Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors. “

1. No One’s Crazy

“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.”

  • “Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.”
  • “ People do some crazy things with money. But no one is crazy. Here’s the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons .”
  • “In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time. But that’s not what people do. The economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation—especially experiences early in their adult life .”
  • “ Their view of money was formed in different worlds. And when that’s the case, a view about money that one group of people thinks is outrageous can make perfect sense to another.”
  • “Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting. Places where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together into a narrative that works for you .”

2. Luck & Risk

“Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes .”

  • “They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take. “
  • “The line between ‘inspiringly bold’ and ‘foolishly reckless’ can be a millimeter thick and only visible with hindsight . Risk and luck are doppelgangers.”
  • “Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. Or, just be careful when assuming that 100% of outcomes can be attributed to effort and decisions .”
  • “Therefore, focus less on specific individuals and case studies and more on broad patterns .”
  • “Go out of your way to find humility when things are going right and forgiveness / compassion when they go wrong. Because it’s never as good or as bad as it looks. “
  • “ You should like risk because it pays off over time. But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time.”

3. Never Enough

“Life isn’t any fun without a sense of enough . Happiness, as it’s said, is just results minus expectations .”

  • “ ‘Enough’ is not too little … ‘Enough’ is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.”
  • “ The hardest financial skill is getting the goalpost to stop moving . But it’s one of the most important. If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort. It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction.”
  • “ Social comparison is the problem here … The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with —to accept that you might have enough, even if it’s less than those around you.”
  • “There is no reason to risk what you have and need for what you don’t have and don’t need.”
  • “There are many things never worth risking, no matter the potential gain.”
  • “Maintaining a lifestyle below what you can afford is avoiding the psychological treadmill of keeping up with the Joneses .” (Note: See voluntary simplicity )

4. Confounding Compounding

“If something compounds—if a little growth serves as the fuel for future growth— a small starting base can lead to results so extraordinary they seem to defy logic . It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to.”

  • “ $81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities.”
  • “ His skill is investing, but his secret is time. That’s how compounding works.”
  • “If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon . Time is the most powerful force in investing.”
  • “Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.”

5. Getting Wealthy vs. Staying Wealthy

“There are a million ways to get wealthy … but there’s only one way to stay wealthy: some combination of frugality and paranoia .”

  • “Good investing is not necessarily about making good decisions. It’s about consistently not screwing up. “
  • “If I had to summarize money success in a single word it would be ‘survival.'”
  • “Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility , and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.”
  • “ The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy , whether it’s in investing or your career or a business you own. There are two reasons why a survival mentality is so key with money. One is the obvious: few gains are so great that they’re worth wiping yourself out over. The other is the counterintuitive math of compounding. Compounding only works if you can give an asset years and years to grow.”
  • “ More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.”
  • “ Planning is important, but the most important part of every plan is to plan on the plan not going according to plan … Many bets fail not because they were wrong, but because they were mostly right in a situation that required things to be exactly right. Room for error—often called margin of safety—is one of the most underappreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline—anything that lets you live happily with a range of outcomes.”
  • “A barbelled personality —optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.”

6. Tails, You Win

“A lot of things in business and investing work this way. Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes. “

  • “That can be hard to deal with, even if you understand the math. It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail . Which causes us to overreact when they do.”
  • “ Anything that is huge, profitable, famous, or influential is the result of a tail event —an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.”
  • “A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy. Tails drive everything. “

“The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays. “

  • “ The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today.’ People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different . But if there’s a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives .”
  • “More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy. “
  • “ Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time. To obtain, bit by bit, a level of independence and autonomy that comes from unspent assets that give you greater control over what you can do and when you can do it.”
  • “Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.”
  • “Aligning money towards a life that lets you do what you want, when you want, with who you want, where you want, for as long as you want, has incredible return.”
  • “Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals . Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want .”

8. Man in the Car Paradox

“No one is impressed with your possessions as much as you are.”

  • “There is a paradox here: people tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired. “
  • “It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will. “

9. Wealth is What You Don’t See

“Spending money to show people how much money you have is the fastest way to have less money.”

  • “We tend to judge wealth by what we see, because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success . Cars. Homes. Instagram photos. Modern capitalism makes helping people fake it until they make it a cherished industry.”
  • “ The truth is that wealth is what you don’t see. Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see. That’s not how we think about wealth, because you can’t contextualize what you can’t see.”
  • “ The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth. We should be careful to define the difference between wealthy and rich . It is more than semantics. Not knowing the difference is a source of countless poor money decisions.”
  • “ Rich is a current income. Someone driving a $100,000 car is almost certainly rich, because even if they purchased the car with debt you need a certain level of income to afford the monthly payment. Same with those who live in big homes. It’s not hard to spot rich people. They often go out of their way to make themselves known.”
  • “ Wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.”
  • “People are good at learning by imitation. But the hidden nature of wealth makes it hard to imitate others and learn from their ways .”

10. Save Money

“Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.”

  • “Independence, at any income level, is driven by your savings rate.” (Note: See FIRE (Financial Independence Retire Early) )
  • “Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.”
  • “Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate , it’s clear which one matters more.”
  • “ Learning to be happy with less money creates a gap between what you have and what you want —similar to the gap you get from growing your paycheck, but easier and more in your control. A high savings rate means having lower expenses than you otherwise could, and having lower expenses means your savings go farther than they would if you spent more.”
  • “ Spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money. Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility. When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little.”
  • “Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.”
  • “ You don’t need a specific reason to save … You can save just for saving’s sake. And indeed you should. Everyone should.”
  • “Everyone knows the tangible stuff money buys. The intangible stuff is harder to wrap your head around, so it tends to go unnoticed. But the intangible benefits of money can be far more valuable and capable of increasing your happiness than the tangible things that are obvious targets of our savings . Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.”
  • “Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose , or wait for investment opportunities that come when those without flexibility turn desperate.”
  • “If you have flexibility you can wait for good opportunities, both in your career and for your investments. You’ll have a better chance of being able to learn a new skill when it’s necessary. You’ll feel less urgency to chase competitors who can do things you can’t, and have more leeway to find your passion and your niche at your own pace . You can find a new routine, a slower pace , and think about life with a different set of assumptions .”
  • “Having more control over your time and options is becoming one of the most valuable currencies in the world.”
  • “Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see.”

11. Reasonable > Rational

“ Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.”

  • “What’s often overlooked in finance is that something can be technically true but contextually nonsense.”
  • “A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down, or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your own personal doubts. Investing has a social component that’s often ignored when viewed through a strictly financial lens. “

12. Surprise!

“ The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next.”

  • “ History is the study of change , ironically used as a map of the future.”
  • “It is smart to have a deep appreciation for economic and investing history. History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future. “
  • “A trap many investors fall into is what I call ‘historians as prophets’ fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress .”
  • “ The most important driver of anything tied to money is the stories people tell themselves and the preferences they have for goods and services. Those things don’t tend to sit still. They change with culture and generation. They’re always changing and always will.”
  • “ The most important economic events of the future—things that will move the needle the most—are things that history gives us little to no guide about. They will be unprecedented events. Their unprecedented nature means we won’t be prepared for them, which is part of what makes them so impactful. This is true for both scary events like recessions and wars, and great events like innovation.”
  • “History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.”
  • “ The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff. But specific trends, specific trades, specific sectors, specific causal relationships about markets, and what people should do with their money are always an example of evolution in progress. Historians are not prophets.”

13. Room for Error

“ Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world.”

  • “ Worship room for error. A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance, and endurance is what makes compounding magic over time.”
  • “The most important part of every plan is planning on your plan not going according to plan.”
  • “There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone—not consistently, anyways. You have to give yourself room for error. You have to plan on your plan not going according to plan. “
  • “History is littered with good ideas taken too far, which are indistinguishable from bad ideas. The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—’unknowns’—are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.”
  • “ Two things cause us to avoid room for error. One is the idea that somebody must know what the future holds, driven by the uncomfortable feeling that comes from admitting the opposite. The second is that you’re therefore doing yourself harm by not taking actions that fully exploit an accurate view of that future coming true.”
  • “If there’s one way to guard against their damage, it’s avoiding single points of failure . A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.”
  • “The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”

14. You’ll Change

“Long-term planning is harder than it seems because people’s goals and desires change over time.”

  • “ An underpinning of psychology is that people are poor forecasters of their future selves. Imagining a goal is easy and fun. Imagining a goal in the context of the realistic life stresses that grow with competitive pursuits is something entirely different. This has a big impact on our ability to plan for future financial goals.”
  • “The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future.”
  • “ We should avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret.”
  • “We should also come to accept the reality of changing our minds.”

15. Nothing’s Free

“Everything has a price, but not all prices appear on labels.”

  • “ Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it. The problem is that the price of a lot of things is not obvious until you’ve experienced them firsthand, when the bill is overdue.”
  • “ Most things are harder in practice than they are in theory. Sometimes this is because we’re overconfident. More often it’s because we’re not good at identifying what the price of success is, which prevents us from being able to pay it.”
  • “Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time.”
  • “The question is: Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns? The answer is simple: The price of investing success is not immediately obvious. It’s not a price tag you can see, so when the bill comes due it doesn’t feel like a fee for getting something good. It feels like a fine for doing something wrong. And while people are generally fine with paying fees, fines are supposed to be avoided. You’re supposed to make decisions that preempt and avoid fines.”
  • “It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor.”
  • “Market returns are never free and never will be. They demand you pay a price, like any other product.”
  • “ The trick is convincing yourself that the market’s fee is worth it. That’s the only way to properly deal with volatility and uncertainty —not just putting up with it, but realizing that it’s an admission fee worth paying. There’s no guarantee that it will be.”
  • “Define the cost of success and be ready to pay for it. Because nothing worthwhile is free.”

16. You & Me

“Beware taking financial cues from people playing a different game than you are.”

  • “ An idea exists in finance that seems innocent but has done incalculable damage. It’s the notion that assets have one rational price in a world where investors have different goals and time horizons.”
  • “Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term.”
  • “The formation of bubbles isn’t so much about people irrationally participating in long-term investing. They’re about people somewhat rationally moving toward short-term trading to capture momentum that had been feeding on itself. “
  • “ It’s hard to grasp that other investors have different goals than we do, because an anchor of psychology is not realizing that rational people can see the world through a different lens than your own. Rising prices persuade all investors in ways the best marketers envy. They are a drug that can turn value-conscious investors into dewy-eyed optimists, detached from their own reality by the actions of someone playing a different game than they are.”
  • “ A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. The main thing I can recommend is going out of your way to identify what game you’re playing.”
  • “Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you. “

17. The Seduction of Pessimism

“Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.”

  • “ Optimism is a belief that the odds of a good outcome are in your favor over time , even when there will be setbacks along the way.”
  • “Money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.”
  • “Pessimists often extrapolate present trends without accounting for how markets adapt.”
  • “Progress happens too slowly to notice, but setbacks happen too quickly to ignore.”
  • “ It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together.”

18. When You’ll Believe Anything

“ Stories are, by far, the most powerful force in the economy. They are the fuel that can let the tangible parts of the economy work, or the brake that holds our capabilities back.”

  • “The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.”
  • “ An appealing fiction happens when you are smart, you want to find solutions, but face a combination of limited control and high stakes. They are extremely powerful. They can make you believe just about anything.”
  • “ Incentives are a powerful motivator, and we should always remember how they influence our own financial goals and outlooks. It can’t be overstated: there is no greater force in finance than room for error, and the higher the stakes, the wider it should be.”
  • “Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.”
  • “Wanting to believe that we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control. “

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  • 🔒  Behind the Scenes: My Evolving Relationship toward the “Money Middle Way”

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About Kyle Kowalski

👋 Hi, I'm Kyle―the human behind Sloww . I'm an ex-marketing executive turned self-education entrepreneur after an existential crisis in 2015. In one sentence: my purpose is synthesizing lifelong learning that catalyzes deeper development . But, I’m not a professor, philosopher, psychologist, sociologist, anthropologist, scientist, mystic, or guru. I’m an interconnector across all those humans and many more—an "independent, inquiring, interdisciplinary integrator" (in other words, it's just me over here, asking questions, crossing disciplines, and making connections). To keep it simple, you can just call me a "synthesizer." Sloww is my synthesis on the art of living for students of life . Read my story.

Sloww participates in the Amazon Services LLC Associates Program. When you purchase a book through an Amazon link, Sloww earns a small percentage at no additional cost to you. This helps fund the costs to support the site and the ad-free experience.

Reader Interactions

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December 17, 2020 at 10:30 AM

I like what you do. Rather I admire it. Your persistence is remarkable. You work hard to present the very best of what you read. You are generous. You go to great lengths to correctly present. You are very mindful and respectful of your audience. If I may, my only suggestion to you will be “come forth” . It will be most wonderful to see you in sloww writings. The time has come. Good bye.

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December 17, 2020 at 11:26 AM

Thank you for the kind words, Reza. And, I greatly appreciate the feedback. Someone else has also suggested that I “humanize” myself more. Here’s my thinking on this currently:

– I’ll be sharing more of my personal story in a new Premium series called “Behind the Scenes.” This will include writing about my life, entrepreneurial journey, and more.

– If “come forth” means show myself in photo/video/audio more, I hope to do some appearances on podcasts in the future. I may also do some audio narration for my eBooks or future course. Due to my introverted personality type, I’m not too interested in having my own podcast or YouTube channel.

– All in all, I feel that my primary purpose (as far as I can tell right now) is synthesizing. I love thinking more than writing—it comes more naturally to me. In the coming year, I’m planning to connect the dots between everything I’ve learned to date. In my mind, this will be my most natural “coming forth” and contribution to the world.

All the best! Kyle

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Society Articles & More

How money changes the way you think and feel, research is uncovering how wealth impacts our sense of morality, our relationships with others, and our mental health..

The term “affluenza”—a portmanteau of affluence and influenza, defined as a “painful, contagious, socially transmitted condition of overload, debt, anxiety, and waste, resulting from the dogged pursuit of more”—is often dismissed as a silly buzzword created to express our cultural disdain for consumerism. Though often used in jest, the term may contain more truth than many of us would like to think.

Whether affluenza is real or imagined, money really does change everything, as the song goes—and those of high social class do tend to see themselves much differently than others. Wealth (and the pursuit of it) has been linked with immoral behavior—and not just in movies like The Wolf of Wall Street .

Psychologists who study the impact of wealth and inequality on human behavior have found that money can powerfully influence our thoughts and actions in ways that we’re often not aware of, no matter our economic circumstances. Although wealth is certainly subjective, most of the current research measures wealth on scales of income, job status, or socioeconomic circumstances, like educational attainment and intergenerational wealth.

psychology of money essay

Here are seven things you should know about the psychology of money and wealth.

More money, less empathy?

Several studies have shown that wealth may be at odds with empathy and compassion . Research published in the journal Psychological Science found that people of lower economic status were better at reading others’ facial expressions —an important marker of empathy—than wealthier people.

“A lot of what we see is a baseline orientation for the lower class to be more empathetic and the upper class to be less [so],” study co-author Michael Kraus told Time . “Lower-class environments are much different from upper-class environments. Lower-class individuals have to respond chronically to a number of vulnerabilities and social threats. You really need to depend on others so they will tell you if a social threat or opportunity is coming, and that makes you more perceptive of emotions.”

While a lack of resources fosters greater emotional intelligence, having more resources can cause bad behavior in its own right. UC Berkeley research found that even fake money could make people behave with less regard for others. Researchers observed that when two students played Monopoly, one having been given a great deal more Monopoly money than the other, the wealthier player expressed initial discomfort, but then went on to act aggressively, taking up more space and moving his pieces more loudly, and even taunting the player with less money.

Wealth can cloud moral judgment

It is no surprise in this post-2008 world to learn that wealth may cause a sense of moral entitlement. A UC Berkeley study found that in San Francisco—where the law requires that cars stop at crosswalks for pedestrians to pass—drivers of luxury cars were four times less likely than those in less expensive vehicles to stop and allow pedestrians the right of way. They were also more likely to cut off other drivers.

Another study suggested that merely thinking about money could lead to unethical behavior. Researchers from Harvard and the University of Utah found that study participants were more likely to lie or behave immorally after being exposed to money-related words.

“Even if we are well-intentioned, even if we think we know right from wrong, there may be factors influencing our decisions and behaviors that we’re not aware of,” University of Utah associate management professor Kristin Smith-Crowe, one of the study’s co-authors, told MarketWatch .

Wealth has been linked with addiction

While money itself doesn’t cause addiction or substance abuse, wealth has been linked with a higher susceptibility to addiction problems. A number of studies have found that affluent children are more vulnerable to substance abuse issues , potentially because of high pressure to achieve and isolation from parents. Studies also found that kids who come from wealthy parents aren’t necessarily exempt from adjustment problems—in fact, research found that on several measures of maladjustment, high school students of high socioeconomic status received higher scores than inner-city students. Researchers found that these children may be more likely to internalize problems, which has been linked with substance abuse.

But it’s not just adolescents: Even in adulthood, the rich outdrink the poor by more than 27 percent.

Money itself can become addictive

The pursuit of wealth itself can also become a compulsive behavior. As psychologist Dr. Tian Dayton explained, a compulsive need to acquire money is often considered part of a class of behaviors known as process addictions, or “behavioral addictions,” which are distinct from substance abuse.

These days, the idea of process addictions is widely accepted. Process addictions are addictions that involve a compulsive and/or an out-of-control relationship with certain behaviors such as gambling, sex, eating, and, yes, even money.…There is a change in brain chemistry with a process addiction that’s similar to the mood-altering effects of alcohol or drugs. With process addictions, engaging in a certain activity—say viewing pornography, compulsive eating, or an obsessive relationship with money—can kickstart the release of brain/body chemicals, like dopamine, that actually produce a “high” that’s similar to the chemical high of a drug. The person who is addicted to some form of behavior has learned, albeit unconsciously, to manipulate his own brain chemistry.

While a process addiction is not a chemical addiction, it does involve compulsive behavior —in this case, an addiction to the good feeling that comes from receiving money or possessions—which can ultimately lead to negative consequences and harm the individual’s well-being. Addiction to spending money—sometimes known as shopaholism —is another, more common type of money-associated process addiction.

Wealthy children may be more troubled

Children growing up in wealthy families may seem to have it all, but having it all may come at a high cost. Wealthier children tend to be more distressed than lower-income kids, and are at high risk for anxiety, depression, substance abuse, eating disorders, cheating, and stealing. Research has also found high instances of binge-drinking and marijuana use among the children of high-income, two-parent, white families.

“In upwardly mobile communities, children are often pressed to excel at multiple academic and extracurricular pursuits to maximize their long-term academic prospects—a phenomenon that may well engender high stress,” writes psychologist Suniya Luthar in “The Culture Of Affluence.” “At an emotional level, similarly, isolation may often derive from the erosion of family time together because of the demands of affluent parents’ career obligations and the children’s many after-school activities.”

We tend to perceive the wealthy as “evil”

On the other side of the spectrum, lower-income individuals are likely to judge and stereotype those who are wealthier than themselves, often judging the wealthy as being “cold.” (Of course, it is also true that the poor struggle with their own set of societal stereotypes.)

Rich people tend to be a source of envy and distrust, so much so that we may even take pleasure in their struggles, according to Scientific American . University of Pennsylvania research demonstrated that most people tend to link perceived profits with perceived social harm. When participants were asked to assess various companies and industries (some real, some hypothetical), both liberals and conservatives ranked institutions perceived to have higher profits with greater evil and wrongdoing across the board, independent of the company or industry’s actions in reality.

Money can’t buy happiness (or love)

We tend to seek money and power in our pursuit of success (and who doesn’t want to be successful, after all?), but it may be getting in the way of the things that really matter: happiness and love.

More on Inequality

Read Jason Marsh's award-winning story on how inequality hurts everyone's happiness .

Discover how inequality can make the wealthy less cooperative .

Find out why affluent people are more likely to break rules .

Explore whether the rich are really less generous .

There is no direct correlation between income and happiness. After a certain level of income that can take care of basic needs and relieve strain ( some say $50,000 a year , some say $75,000 ), wealth makes hardly any difference to overall well-being and happiness and, if anything, only harms well-being: Extremely affluent people actually suffer from higher rates of depression . Some data has suggested money itself doesn’t lead to dissatisfaction—instead, it’s the ceaseless striving for wealth and material possessions that may lead to unhappiness. Materialistic values have even been linked with lower relationship satisfaction .

But here’s something to be happy about: More Americans are beginning to look beyond money and status when it comes to defining success in life. According to a 2013 LifeTwist study , only around one-quarter of Americans still believe that wealth determines success.

This article originally appeared in the Huffington Post and Fulfillment Daily .

About the Author

Carolyn gregoire, you may also enjoy.

Low-Income People Quicker to Show Compassion

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The Psychology of Money

Casinos may be proliferating across america, but las vegas has something special—it's a neon-tinted textbook on the way we see money. in our national shrine to the dollar, our puritanical impulses crash head-on with our conquistador fantasies. there is a psychological cost to the dominance of money in our society..

By Michael Ventura published March 1, 1995 - last reviewed on September 15, 2021

Site Visit to Las Vegas

What's going on?

What are they doing here? And why are they letting themselves lose all that money? Money means a lot to them back home. Why doesn't money mean anything to them in Las Vegas? They can't all have personality disorders (or can they?).

They look normal enough--"normal" as defined not psychologically but statistically: middle class, mostly white, many of them overweight (no matter their age), and wearing the sort of clothes you see in supermarkets and malls. Demographics say that roughly half their marriages end in divorce ; that the fathers spend less than 10 minutes a week in conversation with their children; and that 20 percent of their teenagers haven't talked to either parent for more than 10 minutes in the last month. If they are couples, it's statistically likely that both work and that on weekdays they spend an average of only 20 minutes "alone together" as the old song put it. They work that hard--and hence spend so little time together as families--because they feel they don't have enough money. The vast majority of them share the same attitude toward money: a pervasive, potent mix of acquisitiveness and insecurity. Few, no matter what their financial standing, feel they have enough, and most feel they have nowhere near enough. They are people for whom job security is a thing of the past, and, if they are under 50, they have good reason to fear that Social Security will be drying up by the time they retire.

To them, taxes (even for their children's schools) are anathema, and most want the government to balance its budget. They want to slash federal programs, especially welfare (though it's only three percent of federal spending), because, they tell pollsters, they hate people getting something for nothing. Yet ostensibly that's why they come to Vegas: on the chance that they can win a lot of money and get something for nothing. Still, gambling is at best a puzzling behavior for people with fundamental insecurities about money.

But even if we accept occasional gambling as a form of "entertainment," there are casinos and lotteries all over the country now. If money is their most prominent personal as well as political concern, why make an expensive trip to stay in a pricey hotel that (despite the pools and shows) is really a gambling den, where the odds are decidedly with the house, and where there's little to do but gamble, drink, eat, and see scantily clad people sing and dance? We know that, next to money, they're worried about crime --so why come to a city where homicides are 56 percent higher than the national average, and rapes and robberies 17 percent higher? Something unusual, even bizarre, is going on in Las Vegas.

These people check in at the Luxor, a black pyramid with Nile River gondola rides, depictions of ancient deities, and a surreal mix of Egyptian and Manhattan decor . . . or the Excalibur, a cinder block and fiberglass monstrosity supposedly suggestive of castles, with dime-store mannequins dressed cartoonishly like knights and ladies fair . . . or the MGM, where you walk in through the open mouth of a giant lion and the cast of The Wizard of Oz greets you at the door . . . or the Mirage, with live tigers through one entrance and sharks swimming in a huge tank behind the check-in desk . . . or the new version of Bugsy Siegal's old Flamingo, with its great pink flashing neon . . . or Circus Circus, where trapeze acts soar over your head. They check in, these demographically normal people, leave their gear in rooms that (except for the most expensive) are basic Holiday Inn-type quarters, and take the nearest elevator down to the casino. They'll spend most of their time in the casino, losing money. No matter what the decor, these casinos are very much the same. Hundreds and hundreds of slot and video poker machines fill every available space, ringing, buzzing, flashing. Mazes of them surround what are called "the tables"--tables used mostly for blackjack, with a few for roulette wheels and craps. In a corner, usually roped off, there's a section for poker and baccarat. Most of the casinos also have a "sports room," where you may bet on any game being played anywhere.

The vast majority of these demographically average visitors (who would never call themselves gamblers) prefer the slots and video poker. They plant themselves at these machines, and spend most of their time pouring money in--to the tune of billions a year. Twenty-two million people have to lose only $45.46 each to equal one billion, give or take a few pennies, and it's not uncommon to lose that much in an hour or less. At home these same people--it cannot be overemphasized--would drive many miles to save that much money shopping.

They do not look like they're having a good time--especially for people who've come so far to, ostensibly, and what you see, with few exceptions, is actually a single face: a set expression, rather grim, focused in what is almost a stare, as they mechanically, rhythmically drop coins into the machines. At the roulette tables the expression is almost the same, with the grimness soured almost to glumness as the wheel rejects their numbers again and again. (It's hard not to take that personally.) The blackjack tables are just slightly more animated. Only at craps do people seem to get excited, yell, cheer, moan, applaud--but craps is intimidating, and few play. Most remain at the slots.

They take breaks to eat, many queuing up on lines for a half hour and longer to save money at a $5 buffet. This behavior is difficult to understand, since before and after eating they're willing to lose those same five dollars in minutes or even seconds at the games. Or they'll go to a show. Or lie in the sun by the pool (not so pleasant in place that is often more than 100 degrees in the sun). Or they'll stand around to see the artificial volcano erupt in front of the Mirage, or the full-scale pirate ships (complete with actors) battle in front of Treasure Island. And, especially after dark, they'll walk up and down Las Vegas Boulevard, known as the Strip, with the same set expression that they have at the slots, staring, staring, staring, at each other, at the neon, at the shadows of the desert mountains, and walking in and out of the casinos, where they lose more money.

Since there are slot and video poker machines in virtually every drugstore, liquor store, supermarket, restaurant, bar, and souvenir shop--even at the airport--they lose money everywhere they turn. It is as though they are on automatic pilot, programmed to lose that which they most want.

But it is not enough to note their passivity, for nothing could be less surprising than the passivity of a people who, statistically, spend nearly half their leisure hours watching TV. It would be surprising if they weren't passive. And it's not enough to say--as these people mill together on a sidewalk waiting for an artificial volcanic eruption, or take photos in front of larger-than-life scenes from The Wizard of Oz--that they are subservient to spectacle. Most people, in most societies, have been equally subservient to their respective spectacles, gawking at any distraction no matter how little sense it made. Nor are their grim faces, ever-so-slightly frightened and just a hint angry, very unusual; you can see the same expression on people walking the average city street. Even what can only be called their tastelessness isn't unusual; after all, whatever else you can say about American culture, elegant it's not. (What we lack in elegance we usually make up for in energy.)

What is fascinating and unusual about these people, when compared to how they spend their time elsewhere, is their complete abandon to the act of throwing away money--money that in Las Vegas brings little in return except the act of throwing it away. For most of them, it is not a wild or pleasurable abandon. If anything, it seems a determined and often even a cranky abandon. But it is abandon. They know what they're doing, and they do it with an almost frenetic (though also somehow glum) energy, and they've come a long way and planned a long time to do it. There is little evidence of the passion that (for me, at least) makes abandon worthwhile, but there is every evidence of the quality without which abandon cannot exist: fatalism.

There are few things more un-American in style than fatalism. People came to America to create "a city on the hill," based on a religious faith in progress. American politics , industry, and culture are fueled by this optimism. The GNP must increase, and life must get better and better. No other culture feels this as passionately as ours; no other bases its sense of well-being on such optimism. In America, to be fatalistic is to be seen as dour, depressed.

In our culture fatalism is reserved for quirky "noir" films, or for our great solitary novelists like Melville, Faulkner, Hemingway--but these are often suspect in the eyes of the people at large. Though we seem to have less and less to be optimistic about, people who question the national optimism are seen as a threat. So for average Americans to come a far distance to indulge, albeit not very consciously, in fatalism, particularly fatalism about money, is a phenomenon found on a mass scale nowhere but Las Vegas.

For it's not as though these people don't, on some level, know what they're doing. They're not stupid, after all. People who routinely operate the most complex technological culture in history cannot be considered stupid. They know the odds are with the house. They know that losing here is far more common than winning. And most of them have been here before. Las Vegas couldn't be profitable if people came only once; our population isn't large enough yet for that. It might be fair to say that for so many to come so often is a terrible comment on the dullness of their daily lives, but this doesn't begin to explain the fatalism of regularly visiting Las Vegas. They work terribly hard for their money, they know they are almost certainly going to lose some of that money in Las Vegas, and they come anyway.

The questions, then, are: What does money mean to them, what doesn't it mean, and what do they want it to mean? Of course, they come hoping to win money, a lot of money. A small percentage do win, and an even smaller number win big. They hope to win but, since they are not stupid, they expect to lose. It's clear that the slim chance that they'll win is the psychological mechanism by which they give themselves permission to lose, letting themselves lose without feeling like utter fools. In other words, the slim hope of winning is their door into the fatalism of losing.

For isn't what they're really doing a rebellion against money? In these United States money is our common denominator. It is the absolute standard of access and status--the "bottom line," as we say these days. Not only commerce but education , justice, art, the environment , health care, and often liberty itself must meet the standards and bow to the demands of money. There is precious little among us that isn't rationed, administered, and ultimately valued, in terms of money. The Constitution aside, most Americans consider themselves free insofar as they have access to money.

The "American dream" has come to mean an ideal not of liberty but of prosperity. Our unconscious or half-conscious definition of liberty has become "prosperity." Contemporary politics is based on this equation. Most of our lives revolve around making money (as opposed to the human, communal value of our work, which was the standard for many eras), and most of us judge ourselves according to what we can show for our money. In America money is, if not quite omnipotent, at least omnipresent.

Money plays covert, even insidious, roles in our most intimate relationships. Divorcees who vie viciously for each other's money are only bringing to light what lived in their love from the beginning: the need to be valued--a need that tends to turn ferociously concrete when things go bad. Our secrecy about our salaries is a secrecy about how we are valued. Among men especially, the contest of who will pick up the check is a contest of dominance, and this is only one of the gentler ways men make money felt in their friendships.

It is no wonder that these people are grim as they not so much lose but leave their money in Vegas. Every dollar they sacrifice to the "games" is sticky with the pain of so much that is unadmitted and oppressive in their lives.

Thus losing money in Las Vegas is more a ritual than it is anything else. For when we sacrifice something important and painful, even when it is against our practical interests to do so, and sacrifice in such a specific, even organized, manner, then we are in the realm of ritual.

If this ritual were conscious, if it were a choice, it might bring release, relief, and even happiness . But though these people make a choice to come here, and they know they'll likely lose, the ritualistic aspect of their behavior is hidden beneath countless layers of habit, denial , and a kind of conditioned blindness. ( Psychotherapy wouldn't exist if people didn't hide their major motives from themselves most of the time.) Since the ritual itself, as with so much about money, is unadmitted--repetitive, compulsive, and enacted in a setting that advertises itself as fun--there is a terrible tension in it, as there is in any action the wellsprings of which cannot be acknowledged, or any rebellion that is doomed to fail.

They come to Las Vegas to rebel against the oppression of money and to escape how they've surrendered their spirits so completely to money's laws and demands. That is the real "vacation" they seek. But they seek it in a veritable maze of money, a city that exists to do nothing but suck money from them and that gives virtually nothing back in return.

Their rebellion against money plays into others' lust for money. They sense this, and thus the futility of their rebellion is total. They are, in Las Vegas lingo, "suckers." And there is no way to be proud of being a sucker, or to feel when being suckered that one is somehow also being released. To be compelled to come here, and to submit so completely (though not very consciously) to being a sucker, is to take a vacation into defeat. It is the final victory of the daily grind over the seeking spirit, an unacknowledged submission to all the ways that money causes pain. Thus it is a ritual that defeats and trivializes itself precisely because it is so unconscious.

So for all its glitter, neon, and supposed gaiety, a depression hangs in the desert air over Las Vegas. You don't need to know the statistic that Vegas has one of the highest suicide rates in the world to feel death in the air. You don't need to remember that this city lies in the midst of the Mojave Desert, susceptible to earthquakes on the San Andreas Fault not 150 miles away--a city with lax building codes and thus more vulnerable to quakes than Los Angeles. (A major earthquake's disruption of power, water, and transportation in the 100-plus-degree heat would leave its million-plus inhabitants and visitors dead in days.)

You don't have to think of the sexual desperation in a place where prostitutes are listed in the Yellow Pages (as "escorts") and where naked women and "boylesque" shows are advertised everywhere. You don't have to listen to stars who croon love songs in the midst of all this lovelessness. You don't have to attend the massively hyped boxing matches where men pound at each other to satisfy the frenzy of bettors. You don't have to think much, don't have to analyze. You have only to look at these faces.

In them you'll see the appalling cost we pay for the dominance of money--how it has seeped into our spirits, our psyches, so much so that we come to Las Vegas to both wallow in and exorcise its power. These things cannot be done at the same time, so it is a helpless attempt. And that, finally, is what these faces broadcast: helplessness--the expression of people who don't really know what they're doing but feel compelled to do it anyway.

If this sounds extreme--well, that too fits Las Vegas. It is hard to imagine a city more extreme, more overt, more in the grip of compulsions. It is hard to imagine a place exposing its psychology more nakedly, under the garish tints of its neon. It used to be that Vegas made a kind ofWorld War II it was a tiny desert gamblingtown that few knew of about. Here, in 1946, Bugsy Siegal and oth-ers invented the mod-ern casino. For nearly gangsters held sway, population and fame. Gangsters, almost by definition, have contempt for society, for normal life. Their very existence is an expression of that contempt, and they built this city in their own image. Its garishness, its sexuality , and especially its "play," the games not of chance but of odds that sucked money from all who came here, reflected their temperament, their values, and above all their secret. That secret, the core of their contempt for society, was simply this: that they could not exist, and certainly could not profit, unless supposedly normal people desired what they offered--desired to escape from a moral code they could not live without but could not entirely live within.

The town made a kind of sense because it seemed aware of its purpose, its secret; and it was small and private and, in its way, rather sophisticated. No one walked into a casino casually. Men wore suits and ties, women wore evening clothes. Their fashions and manners suggested that they had come to do something special: transgress. The ritual was almost conscious.

By the mid-1970s the place had grown too big, and was too much in the public eye, to be run overtly by gangsters. Corporations began to take over the casinos. Gradually they've come to call their hotels "resorts," not casinos; and they refer to what goes on there as "gaming," not gambling. The gangster casinos used to be dimly lit; the corporate casinos tend to be bright. The gangster casinos were openly, even proudly, sexy and sly in atmosphere; the corporate casinos hide behind The Wizard of Oz, circuses, knights.

People used to enter a casino formally; now they wear the same outfits they wear to their hometown malls. The corporations are in effect saying, "It's all right to do this, it's good clean fun, nothing to feel shady about." The gangsters' Las Vegas liked feeling shady--relished it, in fact. The corporate Las Vegas denies shadiness in their decor while offering it in their services. The city is as up-front as it ever was, for it can deny neither its purpose nor its psychology; but the people it draws are less up-front, pretending they're doing something quite in keeping with the way they normally live while doing things, especially with monty, that they would never normally do. The toll this takes is seen in their pleasureless faces.

A gangster's rebellion is evident, and their casinos invited license and rebellion. A solid citizen's unconscious rebellion is torture. The solid citizens have come to Las Vegas to defile the very thing that, in their own eyes, makes them solid: money. As in the old Las Vegas, they do here what they can't do elsewhere; but unlike the old Las Vegas, they do it furtively, rarely looking at each other, each alone in front of their machine, pretending to attempt to win what they are almost certain to lose: the money that defines and confines them, the money they slave for and that gives them the small freedoms that excuse their slavery.

Every nickel, every dollar, is alive with pain here. Here the American dreamer is the American sucker. Here, in the last truly wide-open and wild town of the Wild West, everything we've paid so dearly for is stripped bare, our dark side gleams in a neon glow, and we leave finally exhausted by our own helplessness--trying to put the best face on it, telling each other we've had a good time--and usually broke. We go back home, and settle back into the grind of making the money that we've just lost--back to spending 20 minutes a day with our spouses, talking 10 minutes a week with our kids, and accumulating enough money to vacation again in Las Vegas.

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The Psychology of Money

By morgan housel @morganhousel.

(Click here if you’re looking for the book.)

Let me tell you the story of two investors, neither of whom knew each other, but whose paths crossed in an interesting way.

Grace Groner was orphaned at age 12. She never married. She never had kids. She never drove a car. She lived most of her life alone in a one-bedroom house and worked her whole career as a secretary. She was, by all accounts, a lovely lady. But she lived a humble and quiet life. That made the $7 million she left to charity after her death in 2010 at age 100 all the more confusing. People who knew her asked: Where did Grace get all that money?

But there was no secret. There was no inheritance. Grace took humble savings from a meager salary and enjoyed eighty years of hands-off compounding in the stock market. That was it.

Weeks after Grace died, an unrelated investing story hit the news.

Richard Fuscone, former vice chairman of Merrill Lynch’s Latin America division, declared personal bankruptcy, fighting off foreclosure on two homes, one of which was nearly 20,000 square feet and had a $66,000 a month mortgage. Fuscone was the opposite of Grace Groner; educated at Harvard and University of Chicago, he became so successful in the investment industry that he retired in his 40s to “pursue personal and charitable interests.” But heavy borrowing and illiquid investments did him in. The same year Grace Goner left a veritable fortune to charity, Richard stood before a bankruptcy judge and declared: “I have been devastated by the financial crisis … The only source of liquidity is whatever my wife is able to sell in terms of personal furnishings.”

The purpose of these stories is not to say you should be like Grace and avoid being like Richard. It’s to point out that there is no other field where these stories are even possible.

In what other field does someone with no education, no relevant experience, no resources, and no connections vastly outperform someone with the best education, the most relevant experiences, the best resources and the best connections? There will never be a story of a Grace Groner performing heart surgery better than a Harvard-trained cardiologist. Or building a faster chip than Apple’s engineers. Unthinkable.

But these stories happen in investing.

That’s because investing is not the study of finance. It’s the study of how people behave with money . And behavior is hard to teach, even to really smart people. You can’t sum up behavior with formulas to memorize or spreadsheet models to follow. Behavior is inborn, varies by person, is hard to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.

Grace and Richard show that managing money isn’t necessarily about what you know; it’s how you behave. But that’s not how finance is typically taught or discussed. The finance industry talks too much about what to do, and not enough about what happens in your head when you try to do it.

This report describes 20 flaws, biases, and causes of bad behavior I’ve seen pop up often when people deal with money.

1. Earned success and deserved failure fallacy: A tendency to underestimate the role of luck and risk, and a failure to recognize that luck and risk are different sides of the same coin .

I like to ask people, “What do you want to know about investing that we can’t know?”

It’s not a practical question. So few people ask it. But it forces anyone you ask to think about what they intuitively think is true but don’t spend much time trying to answer because it’s futile.

Years ago I asked economist Robert Shiller the question. He answered, “The exact role of luck in successful outcomes.”

I love that, because no one thinks luck doesn’t play a role in financial success. But since it’s hard to quantify luck, and rude to suggest people’s success is owed to luck, the default stance is often to implicitly ignore luck as a factor. If I say, “There are a billion investors in the world. By sheer chance, would you expect 100 of them to become billionaires predominately off luck?” You would reply, “Of course.” But then if I ask you to name those investors – to their face – you will back down. That’s the problem.

The same goes for failure. Did failed businesses not try hard enough? Were bad investments not thought through well enough? Are wayward careers the product of laziness?

In some parts, yes. Of course. But how much? It’s so hard to know. And when it’s hard to know we default to the extremes of assuming failures are predominantly caused by mistakes. Which itself is a mistake.

People’s lives are a reflection of the experiences they’ve had and the people they’ve met, a lot of which are driven by luck, accident, and chance. The line between bold and reckless is thinner than people think, and you cannot believe in risk without believing in luck, because they are two sides of the same coin. They are both the simple idea that sometimes things happen that influence outcomes more than effort alone can achieve.

After my son was born I wrote him a letter:

Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.

2. Cost avoidance syndrome: A failure to identify the true costs of a situation, with too much emphasis on financial costs while ignoring the emotional price that must be paid to win a reward.

Say you want a new car. It costs $30,000. You have a few options: 1) Pay $30,000 for it. 2) Buy a used one for less than $30,000. 3) Or steal it.

In this case, 99% of people avoid the third option, because the consequences of stealing a car outweigh the upside. This is obvious .

But say you want to earn a 10% annual return over the next 50 years. Does this reward come free? Of course not. Why would the world give you something amazing for free? Like the car, there’s a price that has to be paid.

The price, in this case, is volatility and uncertainty. And like the car, you have a few options: You can pay it, accepting volatility and uncertainty. You can find an asset with less uncertainty and a lower payoff, the equivalent of a used car. Or you can attempt the equivalent of grand theft auto: Take the return while trying to avoid the volatility that comes along with it.

Many people in this case choose the third option. Like a car thief – though well-meaning and law-abiding – they form tricks and strategies to get the return without paying the price. Trades. Rotations. Hedges. Arbitrages. Leverage.

But the Money Gods do not look highly upon those who seek a reward without paying the price. Some car thieves will get away with it. Many more will be caught with their pants down. Same thing with money.

This is obvious with the car and less obvious with investing because the true cost of investing – or anything with money – is rarely the financial fee that is easy to see and measure. It’s the emotional and physical price demanded by markets that are pretty efficient. Monster Beverage stock rose 211,000% from 1995 to 2016. But it lost more than half its value on five separate occasions during that time. That is an enormous psychological price to pay. Buffett made $90 billion. But he did it by reading SEC filings 12 hours a day for 70 years, often at the expense of paying attention to his family. Here too, a hidden cost.

Every money reward has a price beyond the financial fee you can see and count. Accepting that is critical. Scott Adams once wrote: “One of the best pieces of advice I’ve ever heard goes something like this: If you want success, figure out the price, then pay it. It sounds trivial and obvious, but if you unpack the idea it has extraordinary power.” Wonderful money advice.

3. Rich man in the car paradox .

When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.

The paradox of wealth is that people tend to want it to signal to others that they should be liked and admired. But in reality those other people bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth solely as a benchmark for their own desire to be liked and admired.

This stuff isn’t subtle. It is prevalent at every income and wealth level. There is a growing business of people renting private jets on the tarmac for 10 minutes to take a selfie inside the jet for Instagram. The people taking these selfies think they’re going to be loved without realizing that they probably don’t care about the person who actually owns the jet beyond the fact that they provided a jet to be photographed in.

The point isn’t to abandon the pursuit of wealth, of course. Or even fancy cars – I like both. It’s recognizing that people generally aspire to be respected by others, and humility, graciousness, intelligence, and empathy tend to generate more respect than fast cars.

4. A tendency to adjust to current circumstances in a way that makes forecasting your future desires and actions difficult, resulting in the inability to capture long-term compounding rewards that come from current decisions.

Every five-year-old boy wants to drive a tractor when they grow up. Then you grow up and realize that driving a tractor maybe isn’t the best career. So as a teenager you dream of being a lawyer. Then you realize that lawyers work so hard they rarely see their families. So then you become a stay-at-home parent. Then at age 70 you realize you should have saved more money for retirement.

Things change . And it’s hard to make long-term decisions when your view of what you’ll want in the future is so liable to shift.

This gets back to the first rule of compounding: Never interrupt it unnecessarily. But how do you not interrupt a money plan – careers, investments, spending, budgeting, whatever – when your life plans change? It’s hard. Part of the reason people like Grace Groner and Warren Buffett become so successful is because they kept doing the same thing for decades on end, letting compounding run wild. But many of us evolve so much over a lifetime that we don’t want to keep doing the same thing for decades on end. Or anything close to it. So rather than one 80-something-year lifespan, our money has perhaps four distinct 20-year blocks. Compounding doesn’t work as well in that situation.

There is no solution to this. But one thing I’ve learned that may help is coming back to balance and room for error. Too much devotion to one goal, one path, one outcome, is asking for regret when you’re so susceptible to change.

5. Anchored-to-your-own-history bias: Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works.

If you were born in 1970 the stock market went up 10-fold adjusted for inflation in your teens and 20s – your young impressionable years when you were learning baseline knowledge about how investing and the economy work. If you were born in 1950, the same market went exactly nowhere in your teens and 20s:

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There are so many ways to cut this idea. Someone who grew up in Flint, Michigan got a very different view of the importance of manufacturing jobs than someone who grew up in Washington D.C. Coming of age during the Great Depression, or in war-ravaged 1940s Europe, set you on a path of beliefs, goals, and priorities that most people reading this, including myself, can’t fathom.

The Great Depression scared a generation for the rest of their lives. Most of them, at least. In 1959 John F. Kennedy was asked by a reporter what he remembered from the depression, and answered :

I have no first-hand knowledge of the depression. My family had one of the great fortunes of the world and it was worth more than ever then. We had bigger houses, more servants, we traveled more. About the only thing that I saw directly was when my father hired some extra gardeners just to give them a job so they could eat. I really did not learn about the depression until I read about it at Harvard.

Since no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty, people go through life with totally different views on how the economy works, what it’s capable of doing, how much we should protect other people, and what should and shouldn’t be valued.

The problem is that everyone needs a clear explanation of how the world works to keep their sanity. It’s hard to be optimistic if you wake up in the morning and say, “I don’t know why most people think the way they do,” because people like the feeling of predictability and clean narratives. So they use the lessons of their own life experiences to create models of how they think the world should work – particularly for things like luck, risk, effort, and values.

And that’s a problem. When everyone has experienced a fraction of what’s out there but uses those experiences to explain everything they expect to happen, a lot of people eventually become disappointed, confused, or dumbfounded at others’ decisions.

A team of economists once crunched the data on a century’s worth of people’s investing habits and concluded: “Current [investment] beliefs depend on the realizations experienced in the past.”

Keep that quote in mind when debating people’s investing views. Or when you’re confused about their desire to hoard or blow money, their fear or greed in certain situations, or whenever else you can’t understand why people do what they do with money. Things will make more sense.

6. Historians are Prophets fallacy: Not seeing the irony that history is the study of surprises and changes while using it as a guide to the future. An overreliance on past data as a signal to future conditions in a field where innovation and change is the lifeblood of progress.

Geologists can look at a billion years of historical data and form models of how the earth behaves. So can meteorologists. And doctors – kidneys operate the same way in 2018 as they did in 1018.

The idea that the past offers concrete directions about the future is tantalizing. It promotes the idea that the path of the future is buried within the data. Historians – or anyone analyzing the past as a way to indicate the future – are some of the most important members of many fields.

I don’t think finance is one of them. At least not as much as we’d like to think.

The cornerstone of economics is that things change over time, because the invisible hand hates anything staying too good or too bad indefinitely. Bill Bonner once described how Mr. Market works: “He’s got a ‘Capitalism at Work’ T-shirt on and a sledgehammer in his hand.” Few things stay the same for very long, which makes historians something far less useful than prophets.

Consider a few big ones.

The 401(K) is 39 years old – barely old enough to run for president. The Roth IRA isn’t old enough to drink. So personal financial advice and analysis about how Americans save for retirement today is not directly comparable to what made sense just a generation ago. Things changed.

The venture capital industry barely existed 25 years ago. There are single funds today that are larger than the entire industry was a generation ago. Phil Knight wrote about his early days after starting Nike: “There was no such thing as venture capital. An aspiring young entrepreneur had very few places to turn, and those places were all guarded by risk-averse gatekeepers with zero imagination. In other words, bankers.” So our knowledge of backing entrepreneurs, investment cycles, and failure rates, is not something we have a deep base of history to learn from. Things changed.

Or take public markets. The S&P 500 did not include financial stocks until 1976; today, financials make up 16% of the index. Technology stocks were virtually nonexistent 50 years ago. Today, they’re more than a fifth of the index. Accounting rules have changed over time. So have disclosures, auditing, and market liquidity. Things changed.

The most important driver of anything tied to money is the stories people tell themselves and the preferences they have for goods and services. Those things don’t tend to sit still. They change with culture and generation. And they’ll keep changing.

The mental trick we play on ourselves here is an over-admiration of people who have been there, done that, when it comes to money. Experiencing specific events does not necessarily qualify you to know what will happen next. In fact it rarely does, because experience leads to more overconfidence than prophetic ability.

That doesn’t mean we should ignore history when thinking about money. But there’s an important nuance: The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tends to be stable in time. The history of money is useful for that kind of stuff. But specific trends, specific trades, specific sectors, and specific causal relationships are always a showcase of evolution in progress.

7. The seduction of pessimism in a world where optimism is the most reasonable stance.

Historian Deirdre McCloskey says, “For reasons I have never understood, people like to hear that the world is going to hell.”

This isn’t new. John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”

Part of this is natural. We’ve evolved to treat threats as more urgent than opportunities. Buffett says, “In order to succeed, you must first survive.”

But pessimism about money takes a different level of allure. Say there’s going to be a recession and you will get retweeted. Say we’ll have a big recession and newspapers will call you. Say we’re nearing the next Great Depression and you’ll get on TV. But mention that good times are ahead, or markets have room to run, or that a company has huge potential, and a common reaction from commentators and spectators alike is that you are either a salesman or comically aloof of risks.

A few things are going on here.

One is that money is ubiquitous, so something bad happening tends to affect everyone, albeit in different ways. That isn’t true of, say, weather. A hurricane barreling down on Florida poses no direct risk to 92% of Americans. But a recession barreling down on the economy could impact every single person – including you, so pay attention. This goes for something as specific as the stock market: More than half of all households directly own stocks.

Another is that pessimism requires action – Move! Get out! Run! Sell! Hide! Optimism is mostly a call to stay the course and enjoy the ride. So it’s not nearly as urgent.

A third is that there is a lot of money to be made in the finance industry, which – despite regulations – has attracted armies of scammers, hucksters, and truth-benders promising the moon. A big enough bonus can convince even honest, law-abiding finance workers selling garbage products that they’re doing good for their customers. Enough people have been bamboozled by the finance industry that a sense of, “If it sounds too good to be true, it probably is” has enveloped even rational promotions of optimism.

Most promotions of optimism, by the way, are rational. Not all, of course. But we need to understand what optimism is. Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism. It’s not complicated. It’s not guaranteed, either. It’s just the most reasonable bet for most people. The late statistician Hans Rosling put it differently: “I am not an optimist. I am a very serious possibilist.”

8. Underappreciating the power of compounding, driven by the tendency to intuitively think about exponential growth in linear terms.

IBM made a 3.5 megabyte hard drive in the 1950s. By the 1960s things were moving into a few dozen megabytes. By the 1970s, IBM’s Winchester drive held 70 megabytes. Then drives got exponentially smaller in size with more storage. A typical PC in the early 1990s held 200-500 megabytes.

And then … wham . Things exploded.

1999 – Apple’s iMac comes with a 6 gigabyte hard drive.

2003 – 120 gigs on the Power Mac.

2006 – 250 gigs on the new iMac.

2011 – first 4 terabyte hard drive.

2017 – 60 terabyte hard drives.

Now put it together. From 1950 to 1990 we gained 296 megabytes. From 1990 through today we gained 60 million megabytes.

The punchline of compounding is never that it’s just big. It’s always – no matter how many times you study it – so big that you can barely wrap your head around it. In 2004 Bill Gates criticized the new Gmail, wondering why anyone would need a gig of storage. Author Steven Levy wrote, “Despite his currency with cutting-edge technologies, his mentality was anchored in the old paradigm of storage being a commodity that must be conserved.” You never get accustomed to how quickly things can grow.

I have heard many people say the first time they saw a compound interest table – or one of those stories about how much more you’d have for retirement if you began saving in your 20s vs. your 30s – changed their life. But it probably didn’t. What it likely did was surprise them, because the results intuitively didn’t seem right. Linear thinking is so much more intuitive than exponential thinking. Michael Batnick once explained it. If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (it’s 134,217,728).

The danger here is that when compounding isn’t intuitive, we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider compounding potential.

There are over 2,000 books picking apart how Warren Buffett built his fortune. But none are called “ This Guy Has Been Investing Consistently for Three-Quarters of a Century. ” But we know that’s the key to the majority of his success; it’s just hard to wrap your head around that math because it’s not intuitive. There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called “Shut Up And Wait.” It’s just one page with a long-term chart of economic growth. Physicist Albert Bartlett put it: “The greatest shortcoming of the human race is our inability to understand the exponential function.”

The counterintuitiveness of compounding is responsible for the majority of disappointing trades, bad strategies, and successful investing attempts. Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that kill your confidence when they end. It’s about earning pretty good returns that you can stick with for a long period of time. That’s when compounding runs wild.

9. Attachment to social proof in a field that demands contrarian thinking to achieve above-average results.

The Berkshire Hathaway annual meeting in Omaha attracts 40,000 people, all of whom consider themselves contrarians. People show up at 4 am to wait in line with thousands of other people to tell each other about their lifelong commitment to not following the crowd. Few see the irony.

Anything worthwhile with money has high stakes. High stakes entail risks of being wrong and losing money. Losing money is emotional. And the desire to avoid being wrong is best countered by surrounding yourself with people who agree with you. Social proof is powerful. Someone else agreeing with you is like evidence of being right that doesn’t have to prove itself with facts. Most people’s views have holes and gaps in them, if only subconsciously. Crowds and social proof help fill those gaps, reducing doubt that you could be wrong.

The problem with viewing crowds as evidence of accuracy when dealing with money is that opportunity is almost always inversely correlated with popularity. What really drives outsized returns over time is an increase in valuation multiples, and increasing valuation multiples relies on an investment getting more popular in the future – something that is always anchored by current popularity.

Here’s the thing: Most attempts at contrarianism is just irrational cynicism in disguise – and cynicism can be popular and draw crowds. Real contrarianism is when your views are so uncomfortable and belittled that they cause you to second guess whether they’re right. Very few people can do that. But of course that’s the case. Most people can’t be contrarian, by definition. Embrace with both hands that, statistically, you are one of those people.

10. An appeal to academia in a field that is governed not by clean rules but loose and unpredictable trends.

Harry Markowitz won the Nobel Prize in economics for creating formulas that tell you exactly how much of your portfolio should be in stocks vs. bonds depending on your ideal level of risk. A few years ago the Wall Street Journal asked him how, given his work, he invests his own money. He replied:

I visualized my grief if the stock market went way up and I wasn’t in it – or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities.

There are many things in academic finance that are technically right but fail to describe how people actually act in the real world. Plenty of academic finance work is useful and has pushed the industry in the right direction. But its main purpose is often intellectual stimulation and to impress other academics. I don’t blame them for this or look down upon them for it. We should just recognize it for what it is.

One study I remember showed that young investors should use 2x leverage in the stock market, because – statistically – even if you get wiped out you’re still likely to earn superior returns over time, as long as you dust yourself off and keep investing after a wipeout. Which, in the real world, no one would actually do . They’d swear off investing for life. What works on a spreadsheet and what works at the kitchen table are ten miles apart.

The disconnect here is that academics typically desire very precise rules and formulas. But real-world people use it as a crutch to try to make sense of a messy and confusing world that, by its nature, eschews precision. Those are opposite things. You cannot explain randomness and emotion with precision and reason.

People are also attracted to the titles and degrees of academics because finance is not a credential-sanctioned field like, say, medicine is. So the appearance of a Ph.D stands out. And that creates an intense appeal to academia when making arguments and justifying beliefs – “According to this Harvard study …” or “As Nobel Prize winner so and so showed …” It carries so much weight when other people cite, “Some guy on CNBC from an eponymous firm with a tie and a smile.” A hard reality is that what often matters most in finance will never win a Nobel Prize: Humility and room for error.

11. The social utility of money coming at the direct expense of growing money; wealth is what you don’t see.

I used to park cars at a hotel. This was in the mid-2000s in Los Angeles, when real estate money flowed. I assumed that a customer driving a Ferrari was rich. Many were. But as I got to know some of these people, I realized they weren’t that successful. At least not nearly what I assumed. Many were mediocre successes who spent most of their money on a car.

If you see someone driving a $200,000 car, the only data point you have about their wealth is that they have $200,000 less than they did before they bought the car. Or they’re leasing the car, which truly offers no indication of wealth.

We tend to judge wealth by what we see. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Vacations. Instagram photos.

But this is America, and one of our cherished industries is helping people fake it until they make it.

Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see.

But that’s not how we think about wealth, because you can’t contextualize what you can’t see.

Singer Rihanna nearly went broke after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”

You can laugh. But the truth is, yes, people need to be told that. When most people say they want to be a millionaire, what they really mean is “I want to spend a million dollars,” which is literally the opposite of being a millionaire. This is especially true for young people.

A key use of wealth is using it to control your time and providing you with options. Financial assets on a balance sheet offer that. But they come at the direct expense of showing people how much wealth you have with material stuff.

12. A tendency toward action in a field where the first rule of compounding is to never interrupt it unnecessarily.

If your sink breaks, you grab a wrench and fix it. If your arm breaks, you put it in a cast.

What do you do when your financial plan breaks?

The first question – and this goes for personal finance, business finance, and investing plans – is how do you know when it’s broken ?

A broken sink is obvious. But a broken investment plan is open to interpretation. Maybe it’s just temporarily out of favor? Maybe you’re experiencing normal volatility? Maybe you had a bunch of one-off expenses this quarter but your savings rate is still adequate? It’s hard to know.

When it’s hard to distinguish broken from temporarily out of favor, the tendency is to default to the former, and spring into action. You start fiddling with the knobs to find a fix. This seems like the responsible thing to do, because when virtually everything else in your life is broken, the correct action is to fix it.

There are times when money plans need to be fixed. Oh, are there ever. But there is also no such thing as a long-term money plan that isn’t susceptible to volatility. Occasional upheaval is usually part of a standard plan.

When volatility is guaranteed and normal, but is often treated as something that needs to be fixed, people take actions that ultimately just interrupts the execution of a good plan. “Don’t do anything,” are the most powerful words in finance. But they are both hard for individuals to accept and hard for professionals to charge a fee for. So, we fiddle. Far too much.

13. Underestimating the need for room for error, not just financially but mentally and physically.

Ben Graham once said, “The purpose of the margin of safety is to render the forecast unnecessary.”

There is so much wisdom in this quote. But the most common response, even if subconsciously, is, “Thanks Ben. But I’m good at forecasting.”

People underestimate the need for room for error in almost everything they do that involves money. Two things cause this: One is the idea that your view of the future is right, driven by the uncomfortable feeling that comes from admitting the opposite. The second is that you’re therefore doing yourself economic harm by not taking actions that exploit your view of the future coming true.

But room for error is underappreciated and misunderstood. It’s often viewed as a conservative hedge, used by those who don’t want to take much risk or aren’t confident in their views. But when used appropriately it’s the opposite. Room for error lets you endure, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor. The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound. So the person with enough room for error in part of their strategy to let them endure hardship in the other part of their strategy has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong.

There are also multiple sides to room for error. Can you survive your assets declining by 30%? On a spreadsheet, maybe yes – in terms of actually paying your bills and staying cash-flow positive. But what about mentally? It is easy to underestimate what a 30% decline does to your psyche. Your confidence may become shot at the very moment opportunity is at its highest. You – or your spouse – may decide it’s time for a new plan, or new career. I know several investors who quit after losses because they were exhausted. Physically exhausted. Spreadsheets can model the historic frequency of big declines. But they cannot model the feeling of coming home, looking at your kids, and wondering if you’ve made a huge mistake that will impact their lives.

14. A tendency to be influenced by the actions of other people who are playing a different financial game than you are.

Cisco stock went up three-fold in 1999. Why? Probably not because people actually thought the company was worth $600 billion. Burton Malkiel once pointed out that Cisco’s implied growth rate at that valuation meant it would become larger than the entire U.S. economy within 20 years.

Its stock price was going up because short-term traders thought it would keep going up. And they were right, for a long time. That was the game they were playing – “this stock is trading for $60 and I think it’ll be worth $65 before tomorrow.”

But if you were a long-term investor in 1999, $60 was the only price available to buy. So you may have looked around and said to yourself, “Wow, maybe others know something I don’t.” And you went along with it. You even felt smart about it. But then the traders stopped playing their game, and you – and your game – was annihilated.

What you don’t realize is that the traders moving the marginal price are playing a totally different game than you are. And if you start taking cues from people playing a different game than you are, you are bound to be fooled and eventually become lost, since different games have different rules and different goals.

Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games.

This goes beyond investing. How you save, how you spend, what your business strategy is, how you think about money, when you retire, and how you think about risk may all be influenced by the actions and behaviors of people who are playing different games than you are.

Personal finance is deeply personal, and one of the hardest parts is learning from others while realizing that their goals and actions might be miles removed from what’s relevant to your own life.

15. An attachment to financial entertainment due to the fact that money is emotional, and emotions are revved up by argument, extreme views, flashing lights, and threats to your wellbeing.

If the average American’s blood pressure went up by 3%, my guess is a few newspapers would cover it on page 16, nothing would change, and we’d move on. But if the stock market falls 3%, well, no need to guess how we might respond. This is from 2015 : “President Barack Obama has been briefed on Monday’s choppy global market movement.”

Why does financial news of seemingly low importance overwhelm news that is objectively more important?

Because finance is entertaining in a way other things – orthodontics, gardening, marine biology – are not. Money has competition, rules, upsets, wins, losses, heroes, villains, teams, and fans that makes it tantalizingly close to a sporting event. But it’s even an addiction level up from that, because money is like a sporting event where you’re both the fan and the player, with outcomes affecting you both emotionally and directly.

Which is dangerous.

It helps, I’ve found, when making money decisions to constantly remind yourself that the purpose of investing is to maximize returns, not minimize boredom. Boring is perfectly fine. Boring is good . If you want to frame this as a strategy, remind yourself: opportunity lives where others aren’t, and others tend to stay away from what’s boring.

16. Optimism bias in risk-taking, or “Russian Roulette should statistically work” syndrome: An over attachment to favorable odds when the downside is unacceptable in any circumstance.

Nassim Taleb says, “You can be risk loving and yet completely averse to ruin.”

The idea is that you have to take risk to get ahead, but no risk that could wipe you out is ever worth taking. The odds are in your favor when playing Russian Roulette. But the downside is never worth the potential upside.

The odds of something can be in your favor – real estate prices go up most years, and most years you’ll get a paycheck every other week – but if something has 95% odds of being right, then 5% odds of being wrong means you will almost certainly experience the downside at some point in your life. And if the cost of the downside is ruin, the upside the other 95% of the time likely isn’t worth the risk, no matter how appealing it looks.

Leverage is the devil here. It pushes routine risks into something capable of producing ruin. The danger is that rational optimism most of the time masks the odds of ruin some of the time in a way that lets us systematically underestimate risk. Housing prices fell 30% last decade. A few companies defaulted on their debt. This is capitalism – it happens. But those with leverage had a double wipeout: Not only were they left broke, but being wiped out erased every opportunity to get back in the game at the very moment opportunity was ripe. A homeowner wiped out in 2009 had no chance of taking advantage of cheap mortgage rates in 2010. Lehman Brothers had no chance of investing in cheap debt in 2009.

My own money is barbelled. I take risks with one portion and am a terrified turtle with the other. This is not inconsistent, but the psychology of money would lead you to believe that it is. I just want to ensure I can remain standing long enough for my risks to pay off. Again, you have to survive to succeed.

A key point here is that few things in money are as valuable as options. The ability to do what you want, when you want, with who you want, and why you want, has infinite ROI.

17. A preference for skills in a field where skills don’t matter if they aren’t matched with the right behavior.

This is where Grace and Richard come back in. There is a hierarchy of investor needs, and each topic here has to be mastered before the one above it matters :

Screen Shot 2018-05-30 at 3.01.12 PM.png

Richard was very skilled at the top of this pyramid, but he failed the bottom blocks, so none of it mattered. Grace mastered the bottom blocks so well that the top blocks were hardly necessary.

18. Denial of inconsistencies between how you think the world should work and how the world actually works, driven by a desire to form a clean narrative of cause and effect despite the inherent complexities of everything involving money.

Someone once described Donald Trump as “Unable to distinguish between what happened and what he thinks should have happened.” Politics aside, I think everyone does this.

There are three parts to this:

You see a lot of information in the world.

You can’t process all of it. So you have to filter.

You only filter in the information that meshes with the way you think the world should work.

Since everyone wants to explain what they see and how the world works with clean narratives, inconsistencies between what we think should happen and what actually happens are buried.

An example. Higher taxes should slow economic growth – that’s a common sense narrative. But the correlation between tax rates and growth rates is hard to spot. So, if you hold onto the narrative between taxes and growth, you say there must be something wrong with the data. And you may be right! But if you come across someone else pushing aside data to back up their narrative – say, arguing that hedge funds have to generate alpha, otherwise no one would invest in them – you spot what you consider a bias. There are a thousand other examples. Everyone just believes what they want to believe, even when the evidence shows something else . Stories over statistics.

Accepting that everything involving money is driven by illogical emotions and has more moving parts than anyone can grasp is a good start to remembering that history is the study of things happening that people didn’t think would or could happen. This is especially true with money.

19. Political beliefs driving financial decisions, influenced by economics being a misbehaved cousin of politics.

I once attended a conference where a well known investor began his talk by saying, “You know when President Obama talks about clinging to guns and bibles? That is me, folks. And I’m going to tell you today about how his reckless policies are impacting the economy.”

I don’t care what your politics are, there is no possible way you can make rational investment decisions with that kind of thinking.

But it’s fairly common. Look at what happens in 2016 on this chart. The rate of GDP growth, jobs growth, stock market growth, interest rates – go down the list – did not materially change. Only the president did:

Screen Shot 2018-05-30 at 1.07.11 PM.png

Years ago I published a bunch of economic performance numbers by president. And it drove people crazy, because the data often didn’t mesh with how they thought it should based on their political beliefs. Soon after a journalist asked me to comment on a story detailing how, statistically, Democrats preside over stronger economies than Republicans. I said you couldn’t make that argument because the sample size is way too small. But he pushed and pushed, and wrote a piece that made readers either cheer or sweat, depending on their beliefs.

The point is not that politics don’t influence the economy. But the reason this is such a sensitive topic is because the data often surprises the heck out of people, which itself is a reason to realize that the correlation between politics and economics isn’t as clear as you’d like to think it is.

20. The three-month bubble: Extrapolating the recent past into the near future, and then overestimating the extent to which whatever you anticipate will happen in the near future will impact your future .

News headlines in the month after 9/11 are interesting. Few entertain the idea that the attack was a one-off; the next massive terrorist attack was certain to be around the corner. “Another catastrophic terrorist attack is inevitable and only a matter of time,” one defense analyst said in 2002. “A top counterterrorism official says it’s ‘a question of when, not if,” wrote another headline. Beyond the anticipation that another attack was imminent was a belief that it would affect people the same way. The Today Show ran a segment pitching parachutes for office workers to keep under their desks in case they needed to jump out of a skyscraper.

Believing that what just happened will keep happening shows up constantly in psychology. We like patterns and have short memories. The added feeling that a repeat of what just happened will keep affecting you the same way is an offshoot. And when you’re dealing with money it can be a torment.

Every big financial win or loss is followed by mass expectations of more wins and losses. With it comes a level of obsession over the effects of those events repeating that can be wildly disconnected from your long-term goals. Example: The stock market falling 40% in 2008 was followed, uninterrupted for years, with forecasts of another impending plunge. Expecting what just happened to happen soon again is one thing, and an error in itself. But not realizing that your long-term investing goals could remain intact, unharmed, even if we have another big plunge, is the dangerous byproduct of recency bias. “Markets tend to recover over time and make new highs” was not a popular takeaway from the financial crisis; “Markets can crash and crashes suck,” was, despite the former being so much more practical than the latter.

Most of the time , something big happening doesn’t increase the odds of it happening again. It’s the opposite, as mean reversion is a merciless law of finance. But even when something does happen again, most of the time it doesn’t – or shouldn’t – impact your actions in the way you’re tempted to think, because most extrapolations are short term while most goals are long term. A stable strategy designed to endure change is almost always superior to one that attempts to guard against whatever just happened happening again.

If there’s a common denominator in these, it’s a preference for humility, adaptability, long time horizons, and skepticism of popularity around anything involving money. Which can be summed up as: Be prepared to roll with the punches.

Jiddu Krishnamurti spent years giving spiritual talks. He became more candid as he got older. In one famous talk, he asked the audience if they’d like to know his secret.

He whispered, “You see, I don’t mind what happens.”

That might be the best trick when dealing with the psychology of money.

More from the blog…

The Psychology of Money: Summary & Review

In The Psychology of Money author Morgen Housel uses interesting stories to illustrate our unlogical behavior with money. We are taught that money is science while it is rather stories, emotions, and soft skills.

Norbert Hires

Norbert Hires

Morgan Housel is one of my favorite financial writers. He is an ex-columnist of The Wall Street Journal and The Motley Fool, his unique style of combining personal finance with global economic trends has already produced writings that I can't stop recommending. In his book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, Housel uses interesting stories to illustrate our behavior towards money. The author argues that how smart we are and how we behave has little to do with how well we manage money. Morgan Housel writes about these behaviors, tips, and psychological tricks.

The Psychology of Money Summary

The Summary of The Psychology of Money

  • Increase your investment time horizon! Time increases gains and smooths out losses.
  • Know what game you are playing! Don't compare yourself to others! Know what is important to you and plan your financial goals accordingly!
  • The most important thing is your savings rate! It's not how much you earn, nor the return on your investments. You can build wealth without a high income, but not without a high savings rate.
  • Freedom makes you happier than money! Use your money to redeem your time.

psychology of money essay

The Psychology Of Money: Timeless Lessons On Wealth, Greed, And Happiness

by Morgan Housel


The story of the millionaire janitor and the broke top exec.

Ronald James Read spent 25 years working in a gas station and 17 years as a janitor at a J. C. Penney.  Read was the first in his family to graduate from high school. He had an average job with modest earnings, from which he saved a lot. And he invested his savings in blue chip stocks. In his will, Read left $2 million to his stepchildren and $6 million to the local hospital and library. Richard Fuscone, a former top executive at Merrill Lynch, lived not far from Ronald Read in his eleven-bedroom luxury mansion. Fuscone graduated from Harvard, had a successful career, and retired early to work in charitable causes. Fuscone went bankrupt in 2000 and lost almost everything. There are two possible explanations for the story of Ronald Read and Richard Fuscone:

  • Financial results are largely influenced by luck, independent of individual intelligence and effort.
  • Financial success is not science-based, but a soft skill. How you behave is more important than what you know.

This soft skill is the psychology of money.

But not many of us possess this soft skill. Mostly because we think and are taught about money as if it were a science like physics (describable by rules and laws) rather than psychology (laced with emotions and nuances). To find out why people take unjustified amounts of credit, it is worth studying not interest rates but the history of greed, uncertainty, and optimism.

1. No one is crazy

We are challenged by the fact that no amount of learning or open-mindedness can truly restore a sense of fear and uncertainty. I can read about what it was like to lose everything during the Great Depression, but I don't have the same emotional scars as those who actually experienced the crisis. Every financial decision a person makes, it makes sense to them at the time.

Americans spend more on lottery tickets than on movies, video games, music, sporting events, and books combined. And who plays the lottery? Mostly the poor. The lowest-income American households spend an average of $412 a year on lottery tickets. Four times more than the highest income households. The people who buy $400 worth of lottery tickets are the same people who say they are unable to save $400 for unexpected expenses. They are burning their safety net for something that has a one-in-a-million chance of coming in. If you put yourself in the shoes of the poorest of the poor, you realize that for the low-income, the lottery ticket is a rational choice . The lottery ticket is the only chance in their lives to get all the good stuff you take for granted. They are paying for a dream that you can't understand because you are already living that dream.

That's why the less wealthy buy more lottery tickets than you do.

2. Luck and risk

Luck and risk are siblings.

The trick to dealing with failure is to plan your financial life so that a bad investment here, or a missed financial goal there can't bring you to your knees, so you can gamble until the odds are in your favor. Years ago, the Nobel Prize-winning economist Robert Shiller was asked, "What would you like to know about investing that we don't know now". "The exact role of luck in successful outcomes." - he replied.

3. When it's never enough

psychology of money essay

The most complicated financial skill to master is the ability to set your goals. But it's also one of the most important. Social comparison is the biggest problem here. As Nassim Taleb explains:

“True success is exiting some rat race to modulate one’s activities for peace of mind.”

There are many things not worth risking. In such cases, the potential gain is irrelevant. Don't get too attached to anything - fame, achievement, or the like. If one thing has unjustly ruined my reputation it only bothers me if I cling to my reputation.

Ideas like letting things go and mentally writing them off from your balance sheet are something that dates back to the stoics:

psychology of money essay

4. Compounding wins

Compounding wins

The great lesson of the Ice Age is that you don't need an incredible amount of power to achieve incredible results. An ice age starts when summer can't warm up enough to melt the previous winter's month. The ice left behind makes it easier to accumulate snow the following winter, which makes it even easier to accumulate even more snow the following winter. Perpetual snow reflects more sunshine, which results in more snow.

In a few hundred years, a seasonal snowpack turns into an all-encompassing continental ice sheet. When something adds up, a little baseline can lead to extraordinary results that defy logic.

5. Becoming vs. staying wealthy

Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

6. How to win

Successful art dealers work like an index fund. Traders buy artworks in a portfolio, not individually. After buying, they wait a few years for the valuable pieces in the portfolio to increase in value. It is not the sum of the value of all the paintings that makes the portfolio profitable, but the few exceptions that become disproportionately valuable. The Russell 3000 index has grown seventy-three times since 1980. This is a spectacular achievement. A spectacular success. But 40% of the companies in the fund have virtually failed. However, 7% of the fund's companies have performed so extremely well that they have more than compensated for the losses.

Research has shown that a sense of control over life is a more reliable predictor of positive well-being than any other objective circumstance in our lives that we take into account. Psychologists call this phenomenon reactivity. Jonah Berger, a marketing professor at the University of Pennsylvania, summarised reactivity as follows:

"People like to feel they are in control - they are in the driver's seat. When we try to make them do something, they feel powerless. Instead of feeling that they have made the decision, they feel that we have chosen for them. So they say no or do something else, even if they would have liked to do the same thing in the first place."

The ability to do what you want, when you want, for as long as you want has an infinite payoff.

8. The man in the car paradox

When you see someone driving a nice car, you rarely think about how cool the guy driving the car is. Instead, you think about how cool other people would think I was if I had a car like that. But they wouldn't think I was cool. You don't think they're cool.

9. Wealth is what you can't see

Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

10. Savings

Wealth building has little to do with your income or investment returns and more to do with your savings rate.

Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.

When you define savings as the difference between your ego and your income, you realize why many people with decent incomes save so little. A daily battle against instinct is to stretch your peacock feathers to the limit and keep up with others who are doing the same.

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Saving only for a specific purpose makes sense in a predictable world. But ours isn't. Saving is a hedge against life's inevitable surprises so that you're not caught off guard at the worst possible moment.

11. Reasonable > Rational

There is a well-documented "bias towards the home". People invest in the companies of the country they live in while ignoring the other 95% of the planet. This would not be rational until you consider that in investing you are effectively giving money to strangers. If familiarity helps you make the leap of faith necessary to continue to support these aliens, then the bias towards the home is rational.

Day trading and picking independent stocks is not reasonable for most investors - the odds are heavily against your success. But both can be reasonable in small amounts if your other more diversified investments are not affected.

12. Surprise

Scott Sagan, a professor at Stanford University, once said something that should be posted on the wall of everyone who follows markets and investing:

"Things happen all the time that have never happened before."

If you rely too much on investment history, you will miss the very outliers that matter most. History can be a misleading guide to the future of the economy and the stock market because it fails to take into account structural changes that are relevant in the present. The interesting quirk of investment history is that the further back you look, the more likely you are to be looking at a world that no longer applies today. Many investors and economists take comfort in the fact that their forecasts are backed up by decades, even centuries, of data. But as economies evolve, the history of the recent past is often the best guide to the future because it is more likely to contain important conditions that are relevant to the future. The right lesson to draw from surprises is that the world is full of surprises. It is not that we should use past surprises to delineate the boundaries of the future; we simply need to acknowledge past surprises and the fact that we have no idea what might happen next.

psychology of money essay

13. Possibilities for error

Tables can be used to tell you whether the numbers are coming out or not. However, they cannot model well how you will feel when you tuck your children in at night and wonder if the investment decisions you made were mistakes that will harm their future.

The difference between what is technically tolerable and what is emotionally possible is an overlooked version of the potential for error.

Unexpected risks

You can plan for all risks, except those that seem too crazy to even think about. And these crazy things can hurt you the most because they happen more often than you think and you have no plan for how to handle them.

14. The future you is different than you now

It's a basic tenet of psychology that people are poor predictors of their future selves. Envisioning a goal is easy and fun (becoming a doctor). Competitive activity in support of a goal, combined with the increased stressors of real life, is something else entirely (12-hour on-call, lost patient...). The reason why people like Ronald Read - the wealthy janitor we met earlier in the book - and Warren Buffett have become so successful is because they have been doing the same thing for decades and have let compound interest do the work. But many of us grow so much over a lifetime that we don't want to do the same thing for decades.

That said, compound interest works best when you allow years, if not decades, for growth. This is true not only for savings but also for careers and relationships. Persistence is the key.

15. Nothing is free

Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it. The problem is that the price of a lot of things is not obvious until you’ve experienced them firsthand, when the bill is overdue.

16. You and me

It's hard to understand that other investors have different goals than we do. We are incapable, because of a mental error, of understanding that rational people can see the world through a completely different lens to our own. It is difficult to justify paying $700,000 for a two-bedroom house in Florida in which you plan to raise your children, but it is perfectly logical to buy the same house if you plan to outsell it in a few months in a market with rising prices. What you don't realize is that the traders who set the share price were playing a different game than you. Sixty dollars for a share was an acceptable price for the trader because he planned to sell the shares before the end of the day when the price was likely to be higher. But sixty dollars was a disaster for you because you wanted to hold the shares for the long term. The most important thing I can recommend is to do your best to find out what game you're playing.

psychology of money essay

17. Tempting pessimism

For reasons I've never understood, people like to hear that the world is going to hell. - Deirdre McCloskey

18. Markets are influenced by stories

In 2007, we told a story about the stability of house prices, the prudence of bankers, and the ability of financial markets to accurately price risk. In 2009, we no longer believed that story. Only that has changed. But it changed the world. Once you choose a strategy or a solution, you invest in it financially and mentally. If you want a particular stock to go up tenfold, growth stocks become your tribe. If you think a certain economic policy will cause hyperinflation, that will be your side.

19. To sum it all up

If you want to perform better as an investor, the most effective thing you can do is to increase your time horizon . Time is the most powerful force in investing. Small things grow big and big mistakes fade away with its help. Use the money to take back control of your time! Not having time is a huge and universal blunder against your happiness. The ability to do what you want, when you want, with whom you want, for as long as you want, pays the highest dividend in money. You have to love risk because it pays off over time. But you should be paranoid about destructive risks because it prevents you from taking future risks that will pay off over time.

20. Definition of Freedom

Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.

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The Psychology of Money: What Does our Relationship to Money Say About Us?

Your relationship to money can reflect your sense of self-worth, the psychology behind why money can't buy happiness.

Christmas - the time of year where the world of the spiritual and the material very often collide. We might be conscious of the need to imbibe some sort of meaning into the church of mass consumerism – but that’s usually after we’ve shopped, eaten, partied, and shopped again.

It’s the time of year when our relationship with money very often reaches heightened levels of anxiety and yet studies show it’s the one relationship in our life we are least likely to look at. In fact, we can feel so detached from money, we don’t even think of ourselves as having a relationship with it at all. And we’ll do anything not to talk about it. Studies show that money is very often the most difficult conversation to have, with 44% of people saying they’d even rather talk about those other two taboos - sex and death - before broaching any conversation about finances. 

And yet, exploring our relationship with money can be revelatory on so many levels. We can find out so much about ourselves by unpacking our cultural and personal relationship with our bank balance. At its most basic level, money can be seen as just a medium for exchange and yet the many meanings we ascribe to it are hugely powerful forces in our life: security, power, love, freedom, comfort, and the list goes on and of course everybody’s list is deeply personal.

What does our relationship to money say about us?

From a psychotherapeutic point of view, we could say that money symbolises our shadowy side. We project all our unconscious relationships to values and self-worth onto the amount of money we earn, or feel we ought to earn. We may find ourselves “slaves” to money, organising our whole lives around making more and more, or we may wonder why money never seems to come our way, perhaps suspecting that deep down we are not worthy of more. Either way, the triangular relationship we have between money, values and our self-worth is hugely revealing.

It is also a relationship heavily intertwined with our society and culture. Take bankers. We might both admire and despise the wealth such as that displayed by Gordon Gekko’s “Greed is good” character from Oliver Stone’s 1987 drama Wall Street . Moving on another 30 years, we’re no longer keeping up with the Joneses; we have the Kardashians to contend with. And while we may find their over-the-top opulence vulgar, there’s a reason why Kim Kardashian has 100 million Instagram followers.

Can money make us happy?

We might instinctively know that money doesn’t make us happy and that beyond a certain point, our happiness stops rising with our income (various studies have come up with different levels of where this peaks). And this knowledge has been proven by what is known as the Hedonic Treadmill , a psychological theory, that shows the more money an individual makes, the more their expectations and desires rise in tandem with that increase in income, which results in no permanent gain of happiness at all.

Indeed, the British psychologist Oliver James claims there is an epidemic sweeping through the English-speaking world, that he calls Affluenza. In his book, he claims the richer we become materially, the poorer we become psychologically and emotionally. According to his research, mass materialism is making us twice as prone to depression , anxiety and addiction . Indeed, this idea that materialism makes us miserable has been around for many years. In his book, The Sane Society , published in 1956, the social philosopher and psychoanalyst Dr Erich Fromm wrote: “A healthy economy is only possible at the expense of unhealthy human beings.”

Yes, our relationship with money is indeed a complex one. As the Jungian analyst James Hillman wrote in his 1982 essay, A Contribution to Soul and Money : “Money problems are inevitable, necessary, irreducible, always present, and potentially if not actually overwhelming. Money is devilishly divine.”

He goes onto say that money “can be taken spiritually or materially but which in itself is neither.” And that “if money divides the two realms, is it also that third which holds them together?” Hillman is touching on very raw nerve: can I be paid well, want nice things and be a good person? In this, he seems to be suggesting that money and soul must be explored together. That we cannot keep dividing the material from the spiritual and that to fully explore oneself, we must look inwards to explore our relationship with money. As we look towards the festive season, with all its inherent contradictions between the spiritual and the material, perhaps there is no finer time to begin the exploration.

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The Psychology of Money

54 pages • 1 hour read

Morgan Housel

A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.

  • Introduction-Chapter 3
  • Chapters 4-6
  • Chapters 7-9
  • Chapters 10-12
  • Chapters 13-15
  • Chapters 16-18
  • Chapter 19-Postscript
  • Key Figures
  • Index of Terms
  • Important Quotes
  • Essay Topics
  • Discussion Questions

Personal Perspectives Inform Financial Management

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The Psychology of Money Summary (18 Chapters)

  • By Omkar Mirajgave
  • On July 24, 2021

The Psychology of Money Book Overview- When it comes to money and investment, we all run behind the returns, history, math and science behind the investment. But the most important part of finance and money is how you behave with it.

But, unfortunately, we forget the psychological relationship with money. And this is what the author Morgan Housel teaches us in the book The Psychology of Money . So let’s explore The Psychology of Money chapter by chapter book summary.

Introduction- The Greatest Show on The Earth

  • A Must Read Book on Personal Finance.
  • This book can help you understand your own financial behaviors and improve money management skills.
  • Short but enjoyable read
  • Ideal for Gifting & Compact for travelling
  • The power of patience, time and compounding is explained in a very layman terms with best examples.

The core concept of the book The Psychology of Money is that doing well with money has little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people. 

But in finance, people know the theory; still, they took decisions based on emotions. 

In 2018, the Author, Morgan Housel, wrote the  report  outlining the 20 most important flaws, biases & causes of bad behavior. It was called the psychology of money. This book is the deeper version of the report. So, let’s explore the psychology of money chapter summary.

Chapter 1 Summary- No One’s Crazy

Your personal experiences with money makeup maybe 0.000001% of what’s happened in the world but maybe 80% of how you think the world works.
  • People do crazy things with money, but no one is crazy. What makes sense to me might seem crazy to you.
  • We all are from different generations, raised by different parents, born into different economics, have different experiences with money.
  • People know the theory that we should make investment decisions based on our goals & characteristics of investment options we have. But that’s not what people do.
  • People who have faced the economic crisis have different biases & thoughts about risk & rewards than those who have seen stable prices their entire life.
  • If you grew up when the stock market was strong, you would invest more money in stocks than those who grow up when stocks were weak.

In short, we do the crazy stuff with money, but we are not crazy.

Chapter 2 Summary- Luck & Risk

Here’s the interesting story of Microsoft’s founder & Co-founder, Bill Gates & Paul Allen. This story can teach you that Luck & Risk are two siblings that can influence an individual’s success more than his efforts. 

In 1968, Bill Dougall, a World War 2 navy pilot turned math & science teacher, made efforts to bring the Teletype Model 30 computer to his Lakeside School. 

Bill Gates & his classmate Paul Allen were studying in the same school. Bill Gates & his friend Paul Allen got access to this computer at age 13 when most university graduates could not get it.

In 1968, roughly 303 million high school-age people were in the world,  according to the UN .

  • About 18 million of them lived in the United States. 
  • About 270K of theme lived in Washington state. 
  • A little over 100K of them lived in the Seattle area. 
  • And only about 300 of them attended Lakeside School. 
  • Start with 303 million, ending with 300. 

One in a million high school-age students had a chance to attend a school that has a computer. And Bill Gates happened to be one of them.

Of course, Bill Gates’s success was due to his dedication & hard work. But, luck played an important role. Even Bill Gates admitted by saying, “If there had been no Lakeside, there would have been no Microsoft.”

Now, here’s the story of Bill Gates classmate Kent Evans. He experienced a powerful dose of luck’s close sibling, risk. 

He was also a part of Lakeside’s computer prodigies gang and had equal skills & drive for computers. He could be the founding partner of Microsoft. But Kent died in a mountaineering accident before he graduated high school.

Every year there are around three dozen mountaineering deaths in the United States. The odds of being killed on a mountain in high school are one in a million. 

Bill Gates & Paul Allen experienced 1 in a million luck by graduating from Lakeside. Kent Evans experienced one in a million risks by never getting to finish graduation.  The same magnitude of force but working in the opposite direction.

Luck & risk are factors that are hard to judge in an individual’s financial success. We can’t emulate the warren buffets’ success because his results are so extreme that we don’t know how much luck is involved.

But two things can point you in a better direction. 

  • Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
  • Focus less on specific individuals and case studies and more on broad patterns.

But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves when judging failure. Nothing is as good or as bad as it seems.

Chaper 3- Never Enough

People who are millionaire wants to be a billionaire. And people who are billionaires want to be in the top 3 of the richest person on earth. Running behind more & more money is a never-ending game.

People do crazy things to reach the next level that they risk the things they need for the things they don’t need. Warren Buffet puts this in better words- 

“To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s just foolish. It is just plain foolish. If you risk something that’s important to you for something that is unimportant to you, it just does not make any sense.”

If you are one of person that doesn’t know what enough is, remember few things- 

1. The hardest financial skill is getting the goalpost to stop moving

There’s no point in increasing expectations with increased results. You will feel the same after putting in extra efforts to increase results. 

“It gets dangerous when the taste of having more – more money, more power, more prestige- increase in ambition faster than satisfaction.”  

2. Social comparison is the problem here

Comparing your wealth with other people is a never-ending game. It’s the battle that can never be won or that the only way to win is not to fight to begin with- to accept that it might have enough, even if it’s less than those around you. 

3. “Enough” is not too little

Having enough doesn’t mean you will not have a comfortable lifestyle. Enough is realizing the point ahead of which you will start regretting. The regret may come in the form of burning out at work for “extra money” or the risky investment allocation you can’t maintain.

4. There are many things never worth risking, no matter the potential gain

  • Reputation is invaluable.
  • Freedom is invaluable.
  • Family and friends are invaluable. 
  • Happiness is invaluable. 

Knowing enough is the key to not taking the risk that will harm these things. And there’s a better and simple tool to  “knowing enough”   that you will find in the next chapter.

Chapter 4- Confounding Compounding

There are more than 2000 books on Warren Buffet, which focus on his investment strategies. But no one focus on simple things that he is investing in since he was ten years old. 

The Buffet is the richest investor of all time. But this doesn’t mean he is the greatest investor.

In fact, Jim Simons, head of the hedge fund Renaissance Technologies, has compounded money at 66% annually since 1998. No one comes too close to his income.

And Warren Buffet has compounded at roughly 22% annually. But simons Net worth is $21 billion & Buffet’s net worth is $84 billion. Why is the difference?

Because Simons did not find his investment stride until he was 50 years old. He had less money to compound.

More than the investment strategies, Buffet’s financial success lies in the simple fact that he started investing at the age of 10 & earned pretty good returns till today.

A good investment is not about trying the strategies to earn the highest interest rates. It seems intuitive, but the highest interest rates tend to be one-off hits that can’t be repeated. Instead, good investing is about earning pretty good returns for a long period of time.

And  knowing enough  is knowing how small investment over a long period of time can fuel huge returns. To do this, you don’t need to risk valuable things that we talked about in the last chapter for the huge potential gain.

The opposite of compounding- earning the highest returns that can’t be held onto- leads to some tragic stories. We will see in the 5th chapter of the psychology of money summary.

Chapter 5- Getting Wealthy Vs. Staying Wealthy

Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.

Author Morgan Housel summarizes money success in a single word & that word is “survival.” Earning money & keeping money are two different things. Earning money requires taking risks, putting yourself out there, being optimistic. 

Keeping money requires humility. It requires having fear in mind that whatever we have earned can be lost. It requires acceptance that some part of our earning is dedicated to luck & past success can’t repeat infinitely.

We can spend years to understand how Warren Buffet found the great companies & made the best investments. But what equally important is he didn’t carry away with debt. He didn’t panic & sell during the 14 recessions he’s lived through. He didn’t rely on one strategy. He didn’t quite.

He survived. And the survival gave him longevity & it helped compounding to make wonders for him.

Appreciate these three things to learn the survival mindset.

1. More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable, I think I’ll get the biggest returns because I will be able to stick around long enough for compounding to work wonders.

No one wants to hold cash during a bull market. 

But if that cash prevents you not to sell the stocks during the bear market, the actual return you earned on that cash could be multiple.  Because preventing ill-timed stock sell can do more for your lifetime returns than picking dozens of big-time winners.

Compounding doesn’t rely on earning big returns. But it relies on earning merely good returns sustained uninterrupted for the longest period of time.

2. Planning is important, but the most important part of every plan is to plan on not going according to plan.

You will learn this concept in detail in Chapter 13.

3. A barbelled personality- optimistic about the future but fearful about what will prevent you from getting to the future- is vital.

Optimism is the belief that things will go well. But the realistic optimism is that over a long time, things will balance out. You might fear the loss in the short term, but after a loss, you will see the growth. This cycle will continue. 

You need a mindset that can be fearful and optimistic at the same time. Short-term fear will keep you alive long enough to exploit long-term optimism.

Chapter 6 is about growing in the face of adversity.

The Psychology of Money Chapter 6 Summary- Tails, You Win

In the business or investment, few events cause the majority of outcomes. Let take the example of Amazon, from books to Fire Phone to travel agencies. 

They experimented with lots of things, many failed, but few Tails succeeded like Prime and Web Services & made a huge impact on their business.

Take the example of Apple. iPhone was the tail product & it made a huge impact on the companies growth. 

When you accept that some events make a huge impact, you embrace the short-term fears & uncertainty. How you behaved in 2008’s recession will likely have more impact on your lifetime returns than everything you did from 2000 to 2008.

“A good definition of an investing genius is the man or woman who can do the average things when all those around them are going crazy.”

Chapter 7- Freedom 

Controlling your time is the highest dividend money pays.

Angus Campbell, a psychologist, researched to know what makes people happy. What he found is quite surprising.

He found that more than income, education or geography, having control over one time no matter what conditions of life are is the common denominator of happiness.

Money’s greatest intrinsic value is its ability to give you control over your time. The ability to do what you want, when you want, with whom you want, for as long as you want is priceless. It is the highest dividend money pays.

The next short chapter is about one of the lowest dividends money pays.

Chapter 8- Man in the Car Paradox

“No one is impressed with your possessions as much as you are.”

Seeing a guy driving a Lamborghini, Tesla or Rolls Royce seems cool. You dream of owning a cool car. You might think having these cars send a signal to people that you are rich. You did it. You are smart & important.

The irony here is that no one gives a shit about  the driver.  People don’t think the driver is cool. They think if I had this care, people would think I’m cool.

Here’s the paradox in the author’s words-  “ People tend to want wealth to signal to others that they should be liked and admired. But in reality, those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.”

What you want is admiration and respect from other people & you think that having expensive stuff like cars or big homes will bring it. It rarely does. 

If this is how you seek money, then be careful. Humility, kindness and empathy will bring you more respect than horsepower.

Chapter 9- Wealth Is What You Don’t See

Spending money to show people how much money you have is the fastest way to have less money.

Say a person buys a Ferrari of $100K. The irony of money is that now he has $100K less money than before buying such an expensive car. 

And we don’t know did he pay in full or took a loan to pay that amount. So he is rich but not wealthy. 

There is a difference between being wealthy & being rich. Rich is the current income & wealth is the income not spent. Wealth is invisible because we can’t see people’s bank account & the money they are not spending.

Wealth is the expensive cars not purchased. Wealth is an expensive watch not worn. Wealth is financial assets that haven’t yet been converted into stuff, you see.

Everyone can become rich by buying big houses, expensive cars but not wealthy. Because to become wealthy you have to save & that’s the next chapter is about.

Chapter 10- Save Money

No matter how much income or investment returns you get, there’s no way to become wealthy if you are not saving. 

That means you can build wealth without high income. Then despite having a decent income, what stops most people from saving? It’s their ego. 

The Author Housel Morgen puts it in this way- “your savings is the gap between your ego & your income. Beyond your basic & comfort needs, the money you spent on is your ego approaching money. You just spent to show the people that you have money. “

And to stop showing off people, you have to care less about people & what they think about you.

Another important idea author put is you don’t need to save for a specific goal. Of course, it’s great to save for a specific goal, but if you don’t have a specific goal, then just save for the sake of saving. It gives you the hidden return.

What’s the hidden return of saving?

Today’s economy is Winner-all-take economy. You can hire the best in the world and so good person to do your work. This is the time when flexibility matters the most.

You need a flexibility to work on new changes, skills to stay relevant in the market or just to wait for a good offer to come your way.

And money in your savings account gives you that flexibility. It gives the freedom, control or flexibility that we can’t calculate.

It gives you the ability to change your course on your terms. It is the hidden return of savings. That’s why more and more people should save money.

Note- From last year, I’m investing my money in mutual funds, giving me the freedom to leave the job & work on this blog. Thanks to ET Money App . (You can invest too!)

Chapter 11- Reasonable > Rational

With finance & investment, making rational decisions doesn’t always work. You’ve to make some reasonable decisions that will work for you.

The difference between reasonable & rational is Rational decisions are based on facts, math, data & science. And the reasonable decisions are based on what you think is correct, although it may seem logical or not.

Here’s an example- Julius Wagner-Jauregg, a psychiatrist, found that fevers play an important role in helping the body fight infection. He found a cure for treating syphilis- a mental disease by inducing fever. He won a Nobel Prize in medicine in 1927.

He was the only person in history who recognized fever’s role in fighting infection and prescribed it as a treatment.

Here’s where science ends, and reality takes over. Science proves fever is good but can we induce it in reality? Of course not, because fevers hurt. And people don’t want to hurt. So it’s reasonable for us not to inject fever in treatment.

The same goes for finance. To quote the author- “Most forecasts about where the economy is headed, and the stock market are heading next is terrible, but making forecasts is reasonable.”

People don’t want to live without a clue of what the future holds. Predicting is human nature. It’s reasonable.

Chapter 12- Surprise!

History is a study of change, ironically used as a map of the future.

You should not take the decisions based on historical events. They should not be the guide to future investments. The world changes. It is full of surprises. You don’t know what will be the next surprise.

To put in author’s word- “The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time. The history of money is useful for that kind of stuff.”

The question then is how we should think about and plan for the future. You will learn it in the next chapter.

Chapter 13- Room for Error

“The most important part of every plan is planning on your plan, not going according.”

When you are planning, you should consider the margin of safety. In addition, you should consider things may not go as you planned. For example, you may retire in the mid of a financial crisis, or a bear market is powerful when considering an exit. 

These things are often overlooked. That’s why you should consider the margin of error & odds that things may not be in your favor. The trick to creating a margin of safety is  to save for nothing.  Save with no goal. Save for things that will happen in the future that you can’t predict. 

Chapter 14- You’ll Change

Long-term planning is hard. Because we evolve, change our minds. You don’t have a guarantee that the job that thrills you today will thrill you after five years. 

Young people pay good money to remove the tattoos that teenagers pay to get it. Middle-age people rushed to divorce people who young adults rushed to marry. 

We change mentally & emotionally over time. And our financial decisions may change as well.  So we should avoid extreme ends of financial planning.  Don’t assume that you’ll live with a low income for a lifetime or choose extra work hours for the pursuit of a higher goal. It will increases the odds to the point that you will regret it.

Chapter 15- Nothing’s Free

Netflix stock returned more than $35,000% from 2002 to 2018 but traded below its previous all-time high on 94% of days. Market returns are never free. It comes with the cost of volatility. 

You have two options. Choose an asset that is less volatile, less uncertain with low pay-off or chooses an asset with higher uncertainty with a higher return. 

Now some people choose the third option- To avoid uncertainty.

Every investor knows that market is volatile still they try to avoid it by trading out when the market is about to collapse trade-in when the market is about to boom. Some get success & some people get caught & punished. 

If you consider volatility as a fee you pay, you will see the magic of compounding. However, if you consider the fee as a fine, you will never enjoy the magic.

Chapter 16- You & Me

Everyone plays a different game.

For example, some people buy expensive stocks in the bull market because it makes sense to them. And they would sell it when their stock becomes more expensive than their purchased price. So they were playing a short-term game. 

The problem comes when a long-term investor invest buy a stock at expensive just by seeing many people are buying it. 

To put in the author Morgen Hosel’s word- “Beware taking financial cues from people playing a different game than you are.”

Chapter 17- The Seduction of Pessimism

  • People used to think that Airplanes are impossible. Then, in 1903, the Wright brothers did their first flight successfully. Still, it took four years six months for people to start taking it seriously.
  • Pessimism draws more attention than optimism. Growth takes time. For destruction, it takes only a moment. 
  • Pessimism reduces expectations. It narrows the gaps between possible outcomes & the outcomes you feel good about. That’s why it is seductive.

Chapter 18- When You’ll Believe Anything

The more you want something to be true, the more you believe in a story that overestimates the odds that it is true.

After the end of World War 1, if you had asked people what the happiest day of their life was, they would be told Armistice Day , i.e., the 1918 agreement that ended World War 1. Why?

Because they thought there would be no war after. And 21 years later, World War 2 happened to kill 75 million people.

We tell the stories to ourselves that we want to believe in.

Think about the market forecasts. Every investor knows we are very bad at it. And after thinking a lot about market forecasts, the only thing that remains is a risk. Still, there is a huge demand for forecasts because we want to believe that we are in control.

With this, we come to an end to The Psychology of Money Summary. Hope you liked the chapter by chapter summary. The 3rd, 8th & 10th chapter was a paradigm shift for me. Do let me know which chapter made you think.

My Personal Review of The Psychology of Money

  • The book was easy to read & digest.
  • The concepts in this book are easy to understand.
  • The book is devided into small chapters.

Since this book was so easy to read and understand, i’ve included it in my list of best non fiction books for beginners . (Recommended reading it.)

Who should you read Morgan Housel’s Psychology of Money book?

  • If you are a beginner and serious about money, this would be a perfect start for you.
  • Someone like me who understand importance of saving & investing, but want to dig deeper.

What to Read After The Psychology of Money?

If you want to read more books on money and personal finance, I’ve created a list of best books on money and personal finance like the psychology of money, it’s called Top 10 Books Like Rich Dad Poor Dad .

Let me know how these books helped you in the comments.

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1. Introduction

4. results: measures to assess money attitudes, 5. results: correlates of money attitudes, 6. discussion, 7. limitations, 8. conclusion, author contributions, competing interests, understanding individual attitude to money: a systematic scoping review and research agenda.

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Correspondence: Department of Psychology, Università Cattolica del Sacro Cuore, L.Go Gemelli 1, 20123 Milan, Italy [email protected]; Mobile: 0393490930730

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Giulia Sesini , Edoardo Lozza; Understanding Individual Attitude to Money: A Systematic Scoping Review and Research Agenda. Collabra: Psychology 3 January 2023; 9 (1): 77305. doi:

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In the last decades, several disciplines have started to investigate the heterogeneous meanings attributed to money, contributing to defying the classic vision of money as a purely neutral object through an interdisciplinary perspective. Notably, the construct of money attitude, defined as a mirror of perceptions, beliefs, and feelings about money, has captured attention. Considering the richness and fragmentation of previous literature around the construct, a systematic scoping review was conducted to (1) inquire into how money attitude was measured from a methodological perspective and (2) map its connections with key correlates, such as demographics, macro-economic factors, personality, financial practices, and job-related variables. Through a systematic search in four databases, 226 articles were selected, including studies from both economic and social sciences. From a methodological perspective, several validated scales exist, which only partially overlap, outlining the heterogeneity of the construct of money attitude. Furthermore, the relationship between money attitudes and key correlates emerges as complex and occasionally blurred. Based on these results, an integrative framework is proposed and directions for future research are outlined, discussing methodological specificities of validated scales and alternative methodologies. Additionally, overlooked topics deserving further examination are highlighted, including the investigation of emotional underpinnings of money, antecedents of money attitudes and their relationship with unsound behaviors. Implications for practitioners are also discussed, from the need to recognize the role of money attitude in the client–financial advisor relationship to the importance of consumers’ segmentation.

“Money is probably the most emotionally meaningful object in contemporary life; only food and sex are its close competitors as common carriers of such strong and diverse feelings, significances, and strivings.” (Krueger, 1986, p. 3)  

Economic theory has mostly treated money from a neutral perspective, as a means of exchange, a reserve of value or merely a unit of account. However, money is not, and never has been, a neutral thing. Instead, people imbue it with meanings, emotions and beliefs that go beyond the simple use of money in instrumental terms. The exploration of symbolic meanings and emotions associated with money has been long neglected in economic psychology research. Besides psychoanalysis (e.g., Freud, 1908 ), the first articles that systematically addressed the topic were published in the 70s and 80s (e.g., Furnham, 1984; Wernimont & Fitzpatrick, 1972; Yamauchi & Templer, 1982 ); however, it is from the 90s that the concept of “money attitude” began to gain increasing attention within the academic world (Furnham & Argyle, 1998; Hermalin & Isen, 2000; Mitchell & Mickel, 1999) . Indeed, the construct of money attitudes has been at the center of the attention of many disciplines, including economics, finance, sociology, and psychology, establishing therefore its trans-disciplinary nature. Attitudes towards money are a function of one’s perceptions, beliefs, and feelings about money and of behavioral tendencies in matters related to money. Scholars agree on its multi-dimensional nature, identifying three key areas in its affective, cognitive, and behavioral dimensions. Indeed, money emerges as a vehicle of both internal aspects (negative and positive emotions) and external forms of evaluation with others (Furtner, 2020; Langley et al., 2019; Lea & Webley, 2006) . Moreover, money has a highly charged symbolic meaning, since people attribute to it features beyond its function as a tool of economic exchange (Gasiorowska, 2014; Luna-Arocas & Tang, 2004) . In the cognitive dimension, money attitude is an expression of beliefs and opinions that individuals hold about money. Last, the behavioral dimension mirrors a pragmatic attitude to money, which at least partially includes its instrumental function.

Individual differences in meanings and interpretations of money reflect several factors, such as gender, age, wealth, or personality (Furnham & Argyle, 1998) , and many taxonomies of money attitudes have been developed, mainly revealing motives, beliefs, and behavioral orientations towards money. The existing literature about money attitudes is thus quite fragmented, revealing a wide variety of methodological tools used to measure the construct and a rich (and heterogeneous) body of results concerning the role of money attitudes in many different contexts. Previous reviews on the psychological perspective on money provided insights on methods and demographics but without adopting a systematic approach (Furnham & Grover, 2022; X. Wang et al., 2020) . Considering the richness and fragmentation of previous literature regarding money attitude, this (systematic) scoping review aims to map existing knowledge around the topic, specifically 1) inquiring how this multi-dimensional construct has been investigated from a methodological perspective and 2) mapping its connections with key correlates, such as socio-demographical variables, macro-economic factors, personality traits and values, money management practices, and job-related variables. To do so, we systematically reviewed studies investigating the attitudes towards money in order to outline their conclusions, describe how they measured money-related variables, and delineate future directions as well as practical implications derived from the review.

To achieve our aim, a scoping review was selected from among the different existing knowledge synthesis methodologies (Whittemore et al., 2014) . Such methods allow us to map concepts, evidence and gaps around a defined research area through a systematic process of searching and selecting sources of knowledge (Colquhoun et al., 2014) . Furthermore, the review adopted the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) statement as a methodological guideline to ensure a transparent and complete reporting ( Figure 1 ) (Peters et al., 2015) . As a first step, we had to define the research questions so as to outline the key information from each source:

Diffusion: When was the study published? What journal published the paper? Where was the study conducted? Who is(are) the author(s)?

Purpose and research questions: What was the overall aim of the study? What other variables were included in the study? Which context did the research focus on?

Operationalization of the construct: What dimension(s) of money attitudes did the research investigate?

Methods: Which methods were used? What instrument did the author(s) use to investigate money attitudes? Was it validated? What dimensions of money attitudes were included? How many items did the author(s) employ?

Results: What did the study find about the connection between money attitudes and the investigated variables?

Next, we had to define how to identify the relevant studies, including decisions about where to search and how to compose the search string (Levac et al., 2010) . The following four electronic databases were used to conduct the research, so as to cover a wide range of areas and academic fields: Scopus, Web of Science, PsycINFO and EconLit. The databases were searched up to 7 April 2022. The following Boolean search string was researched in titles, abstracts and key words: [(“money attitude*” OR “attitude* toward* money” OR “attitude* to money” OR “money type*” OR “money belief*” OR “monetary belief*” OR “money factor*” OR “meaning* of money” OR “money meaning*” OR “love of money” OR “money style*” ) OR ( “money” AND ( “emotional association*” OR “emotional dimension*” OR “affective association*” OR “affective dimension*” OR “emotional side*” OR “affective side*” OR “emotional trait*” OR “affective trait*”))]. The string was searched in the four databases, resulting in a pool of 624 papers (English-language articles), after duplicates removal. Six additional papers were added from other sources (e.g., analyzing references of selected papers). To be selected, studies were required to: a) be peer-reviewed papers; b) be full-text English written papers; c) be empirical papers; d) focus on attitudes towards money, including meanings, beliefs and emotions attributed to money, in different contexts (such as consumption, ethical decisions, financial behaviors, salary, and well-being, among others); e) focus on the individual dimension rather than on couples or households (since dyadic and group dimension involves dynamics going beyond the target of this review); and f) include adult subjects rather than children or adolescents. Also, exclusion criteria included: a) papers investigating attitudes towards constructs other than money (e.g., credit, saving, risk); b) studies involving a population of children and adolescents (since they do not have a well-defined and established relationship with money, due to lack of experience in the economic domain); c) papers which were not peer-reviewed (e.g., book reviews, conference abstracts); and d) theoretical dissertations with no empirical studies. The first selection stage involved the screening of titles and abstracts, and it was performed independently by two researchers; any disagreement was discussed to reach an agreement. When the information included in the abstract was not sufficient to determine inclusion or exclusion, the full text was examined. After the screening of titles and abstracts was completed, 363 papers were excluded that did not fit the eligibility criteria (e.g., papers examining parental influence on children’s financial behaviors, studying the effect of socio-demographics on financial well-being, exploring the role of money in couples’ satisfaction, investigating the predictors of online and offline shopping, etc.). Finally, 226 papers met the abovementioned criteria and were included in the following analysis, while 41 were excluded after reading the full text (e.g., because they only focused on money management practices, or they were theoretical papers). The full list of references included in the review is available upon request from the authors.

Figure 1.

The result section is organized as follows: descriptive data are provided, giving an overview of selected papers in terms of year of publications, countries, and journals. Next, methodological aspects are outlined, discussing the most used scales in the literature. Last, the relationship between money attitudes and correlates is presented, including demographics, macro-economic factors, personality traits and ethical values, money management practices, financial well-being and job-associated factors.

3.1. Descriptives

Overall, 226 papers were included in the scoping review. Papers were published between 1971 and 2022, and in Figure 2 a growing number of publications can be acknowledged, particularly after 2000.

Figure 2.

Regarding the countries where research was conducted, 31% of studies was performed in Asia, and another 30% in North America, followed by 23% of studies carried out in Europe ( Table 1 ).

As for the methodological aspect, almost all studies (95.6%) adopted a quantitative perspective (mainly through surveys), while the remaining 4.4% employed qualitative or mixed methods (e.g., Belk & Wallendorf, 1990; Chan-Brown et al., 2016 ). Looking at the journals, the most represented journal was Journal of Business Ethics (fields of business, management, economics) which published 8% of the selected papers. The Journal of Economic Psychology and Personality and Individual Differences follow with 6% of studies each, and Psychological Reports accounts for 5% of publications. The remaining journals published less than 8 articles each.

Many different scales have been developed to measure individual attitudes towards money. The next section is organized as follows: the most used scales will be individually presented, discussing dimensions and contents; next, additional measures will be introduced, presenting the potentials of each one despite their limited presence in the literature. Overall, we will focus on four major scales used by 64% of the articles (see Table 2 ). The Money Attitude Scale will be presented first. The Love of Money Scale will follow, jointly with the Money Ethics Scale, as the former originated from the latter. Next, the Money Beliefs and Behaviors Scale will be discussed. Last, a section will be devoted to other measures.

4.1. Money Attitude Scale

The Money Attitude Scale (MAS) was created by Yamauchi and Templer (1982) , in the attempt to fill the gap in the psychological literature about money. To do so, they relied on a deep investigation of clinical and psychodynamic literature, targeting Freud, Ferenczi, and other psychotherapists’ thoughts. Starting from a conception of money as a meaningful object exerting subconscious effects on people, the two authors proposed a tool covering five specific content areas: retention-time (assessing the tendency toward careful financial planning and placing great value on being prepared for the future rather than a present-oriented vision); distrust (referring to hesitancy and suspicion in situations involving money); anxiety (a person high on anxiety experiences money as a source of stress as well as a source of protection from anxiety); power-prestige (involving a vision of money as a means to influence, impress others and show one’s superiority); and quality (dropped in the validation study due to internal consistency issues, this factor is linked to an attention to premium products and good deals). MAS had been used in several domains, including saving and credit behavior (e.g., Doğan et al., 2018; Hayhoe et al., 2012; Norvilitis et al., 2003; Simanjuntak & Rosifa, 2016 ), purchasing habits (e.g., Mulyono & Rusdarti, 2020; Workman & Lee, 2019 ), personal values (e.g., Manchanda, 2017; Watson et al., 2004 ), and money management (e.g., Elgeka et al., 2018; Spinella et al., 2007 ).

The scale had been used and validated in sixteen countries around the world, mostly in North America (e.g., Baker & Hagedorn, 2008; Medina et al., 1996; Shafer, 2000; Spinella et al., 2014 ) but also in Europe (e.g., Engelberg, 2007; Furtner et al., 2021; Lejoyeux et al., 2011; Pereira & Coelho, 2020 ), Asia (e.g., Durvasula & Lysonski, 2010; Khandelwal et al., 2021; Mulyono & Rusdarti, 2020; Rimple, 2020 ), South America (Roberts & Sepulveda, 1999a, 1999b; Veludo-de-Oliveira et al., 2014) , Africa (Bonsu, 2008; Burgess, 2005; Rousseau & Venter, 1999) , and Australia (Phau & Woo, 2008) .

Although many studies used the original scale proposed by Yamauchi and Templer, several versions of the MAS are available, selecting only some dimensions or mixing them (e.g., mixing distrust and anxiety as a single factor; Medina et al., 1996 ). Some studies succeeded in replicating the same structure, while others proposed a divergent framework. For instance, price sensitivity emerged as an additional factor, to indicate personal attention to prices and bargains (Khare, 2014; Norum, 2008; Phau & Woo, 2008; Roberts & Jones, 2001) . Also, the original MAS employed a 7-point Likert-type scale, with 1=never and 7=always. However, other scholars selected a different format with 5 points (e.g., Hayhoe et al., 2012; Pereira & Coelho, 2020; Rousseau & Venter, 1999 ) or 4 points (Simanjuntak & Rosifa, 2016) .

4.2. Money Ethic Scale and Love of Money

Developed in the organizational context, the Money Ethic Scale was designed to investigate how the significance attributed to money impacts work-related behaviors and motivations. Money ethic refers to a frame of reference through which people examine their everyday life (T. L.-P. Tang, 1992) . Initially, the scale was validated on a sample of American full-time workers and was composed of six factors and 30 items: the factor Good refers to the degree of importance money holds in one’s life; Evil reflects a negative attitude to money, viewing it as a pernicious and shameful object; a high score on Achievement means that money symbolizes success and status; the factor Respect entails the belief that money can help to express one’s abilities and value; Budget refers to the individual capacity to manage in- and out-flows; and lastly, the factor Freedom (Power) implies a vision of money as a passport to gain autonomy and exert power. As underlined by Tang (1993) , it is possible to identify three macro-dimensions of money ethic: the affective component (comprising good and evil) corresponds to one’s perception of money as a useful and valuable thing in life, as opposed to a vision of money as evil and useless; the cognitive component (including achievement, respect, freedom/power) includes people’s beliefs about money as a symbol of success and autonomy; and the behavioral component (referring to budget) relates to how people manage their money. A short version was later proposed, comprising 12 items and three factors, namely Success, Evil and Budget (T. L.-P. Tang, 1995) . Both the long and the short versions employ a 7-point Likert-type scale, although other studies used a 5-point scale.

Ten years after the publication of the Money Ethic Scale, Tang introduced a new concept: the Love of Money (T. L.-P. Tang & Chiu, 2003) . Inspired by the Western and Judeo-Christian proposition “the love of money is the root of evil” (Bible: 1 Timothy, 6: 10), he proposed to examine this construct in an attempt to provide insights and implications in the organizational and working contexts. Indeed, the idea behind Love of Money relates to business ethics, which is a guiding principle of employees when making decisions in business contexts. Operationally, Love of Money represents a sub-dimension of the Money Ethic Scale. The validation study included four factors: motivator (money is a motivational driver), success (money is a sign of one’s success and achievement), rich (individual actions are connected to the desire to become rich), and importance (money is a critical part of one’s life). Later studies also validated different versions of the scale, with 9 items (factors of rich, motivator, and importance) (e.g., N. Tang et al., 2018; T. L.-P. Tang, Chen, et al., 2008 ) to 15 items (factors of budget, evil, equity, success, and motivator) (e.g., Oliveira & Marques, 2020; T. L.-P. Tang et al., 2004 ).

Both the LOM and the MES have been studied in a body of research conducted all over the world. Besides the United States, where most of the studies were conducted, the scales were used in Europe (e.g., Henchoz et al., 2019; Lemrová et al., 2014; Manippa et al., 2021 ), Asia (e.g., Jia et al., 2013; Kashif & Khattak, 2017; Sundarasen & Rahman, 2017; Y.-D. Wang & Yang, 2016; Wong, 2008 ), Brazil (Monteiro et al., 2015) , and Africa (Fatoki, 2015; Owusu, Bekoe, et al., 2021) . Furthermore, cross-cultural research has been carried out for both the MES and the LOM scale (Luna-Arocas & Tang, 2004, 2015; Marques et al., 2019; T. L.-P. Tang, Furnham, et al., 2002; T. L.-P. Tang, Luna‐Arocas, et al., 2005; T. L.-P. Tang, Sutarso, et al., 2008) . Looking at the research context, the vast majority of studies using the LOM or the MES were performed in the organizational and working context or in relation to ethical perceptions; the few exceptions concern investments (N. Tang et al., 2018) , tax compliance (Pratama, 2017) , and money management (Aydin & Akben Selcuk, 2019; Chuah et al., 2020; Sundarasen & Rahman, 2017) .

Following and enlarging the previous studies, Tang and Sutarso (2013) formulated the theory of Monetary Intelligence, including the construct of love of money. The theory posits that monetary intelligence represents an individual difference variable, comprising affective (ability to appraise monetary motive), behavioral (control intentions and actions linked to money) and cognitive (promote well-being and personal growth) components. As the authors did with the MES and LOM scales, the Monetary Intelligence Scale followed, composed by three macro dimensions: a behavioral component (Making, Budgeting, Donating Money, and Contributing); an affective component (aspiration for money and strong emotions); and a cognitive component (involving Achievement, Respect, Power, and Happiness). The scale has been particularly used to study unethical intentions (e.g., Chen et al., 2014; Sardžoska & Tang, 2015; T. L.-P. Tang, 2016; T. L.-P. Tang & Sutarso, 2013 ), job satisfaction (e.g., Sardžoska & Tang, 2015 ), and pay and life satisfaction (e.g., T. L.-P. Tang et al., 2018a ). The construct has been broadly used in three dozen entities around the world (T. L.-P. Tang et al., 2018a, 2018b) .

4.3. Money Beliefs and Behaviors Scale

One of the first developed scales to measure money attitudes is the Money Beliefs and Behaviors Scale (MBBS), conceived and validated by Furnham (1984) . The aims behind the development of this instrument were to investigate the relationship with socio-demographic features and to explore the etiology of beliefs associated with money. The MBBS was validated with a British sample and comprised 60 items on a 7-point agree–disagree scale, inspired by the MAS (Yamauchi & Templer, 1982) , the Midas scale used by Rubinstein (1980) with readers of Psychology Today, and the work by Goldberg and Lewis (1979) . The scale included six separate factors: Obsession (centrality of money in one’s life), Power/spending (relative to a use of money to show off and reflect status), Retention (tendency to keep money or use it cautiously), Security/conservative (a more “traditional” approach characterized by conserving money as a safety net), Inadequacy (feeling of not having enough money), and Effort/Ability (belief about money reflecting competence). Later versions exist, like the one proposed by Bailey and Gustaffson (1991) comprising factors of obsession, inadequacy and retention. Other studies failed in replicating the original structure (e.g., Sabri & Zakaria, 2015; Yang & Lester, 2002 ) or modified the scale to better fit specific targets (e.g., university students in Hayhoe et al., 2005 ). Mostly employed in US studies (e.g., Allen et al., 2007; Christopher et al., 2004; Stone & Maury, 2006 ), the MBBS was used also in studies conducted in Europe (UK: Furnham, 1984 ; Netherlands: Wiepking & Breeze, 2012 ; Germany: Kirkcaldy & Furnham, 1993 ; Russia: Tatarko & Schmidt, 2012 ) and Asia (e.g., Abdullah et al., 2019; Khaleque, 1992; Wu & Lin, 2003 ). Lastly, a very large study on 41 different countries was conducted by Furnham et al.  (1994) to examine the relationship between attitudes and a great variety of up-to-date economic measures. Like the MAS, the MBBS was included in many research contexts: credit behavior (e.g., Hayhoe et al., 2005; Yang & Lester, 2001 ), purchasing habits (e.g., Hanley & Wilhelm, 1992; Yang & Lester, 2005 ), personal values (e.g., Christopher et al., 2004; Tatarko & Schmidt, 2012 ), and investments (Owusu, Anokye, et al., 2021) . More recently, Lay and Furnham (2019) created a new money attitudes questionnaire, partially overlapping the MBBS, with the addition of financial literacy worries. This factor relates to a retentive attitude, characterized by a degree of ignorance about financial events and affairs resulting in anxiety and worry.

4.4. Other Measures

As mentioned above, besides the four most employed scales (MAS, MES, LOM, MBBS), there are also additional validated measures that are less popular than these.

Lim and Teo (1997) created their own instrument to measure money attitudes, in an attempt to adopt a combined and more reliable version of the previous scales (MAS, MBBS, MES). They obtained a 34-item scale, containing eight factors, partially comparable with Furnham’s: Obsession (reflecting individuals’ preoccupation with thoughts of money), Power (money is experienced as a source of power), Budget (referring to the ability to use money cautiously), Achievement (reflecting the perception that the amount of money earned is an indicator of success), Evaluation (money is seen as a means of comparison), Anxiety (reflecting a worrisome attitude about money), Retention (linked to a pathological tendency to refrain from spending), and Non-generous (referring to individuals who are unlikely to donate to charity). First validated in Singapore, the scale has been used in the US (Oleson, 2004) , China (Lim, 2003) , Switzerland (Keller & Siegrist, 2006a) , Australia (Dowling et al., 2009) and UK (X. Wang & Krumhuber, 2017) .

In the marketing field, the Money-Motivation Scale (MMS) was created by Rose and Orr (2007) to explore the symbolic meanings of money. Through a mixed-methods study including in-depth interviews and quantitative studies, the authors developed a scale to measure four dimensions: status (reflecting the tendency to view money as a sign of prestige), achievement (referring to the perception of money as a proof of one’s accomplishments), worry (depicting a worrisome attitude to money), and security (linked to the tendency to save and value money as a source of safety). As outlined by the authors, those dimensions refer to the motivational meanings associated with money, which exert an influence on consumption behaviors and money management styles. Originally validated in the US, the scale was also used in South Africa (Duh, 2016; Inseng, 2019) , China (Duh et al., 2021) , Brazil (Barros et al., 2017) , and Turkey (Dogan & Torlak, 2014) .

Next, taking inspiration from the work of previous clinical psychologists regarding the meanings associated with money (Forman, 1987; Goldberg & Lewis, 1979) , the Money Types Questionnaire was developed (Furnham et al., 2012) , with the aim of evaluating a short tool to measure the most frequent meanings of money and to better understand people’s relationship with money. The authors included four factors representing “the most common unique money-associated emotions” (Furnham et al., 2012, p. 707) : love (money as a substitute for emotion and affection), power (money as a means to acquire control and importance), freedom (money as a means to pursue one’s interests and gain autonomy), and security (money as an emotional lifejacket). Despite some reliability issues, the questionnaire has been used in several studies, mostly in UK (Fenton‐O’Creevy & Furnham, 2020; Matz & Gladstone, 2020; von Stumm et al., 2013) , although some research has also been carried out in Italy (Lippi et al., 2021; Lozza et al., 2022) , Australia (Furnham & Murphy, 2019) and the US (Matz & Gladstone, 2020) .

Another recent scale was developed by Gasiorowska (2008) . Starting from the distinction between the instrumental and symbolic functions of money, the author proposed an instrument able to give insights in terms of money management (the instrumental component of money attitudes) and affective meanings (assessing the trigger of positive or negative aspects). Promising results have been provided regarding the relationship between money attitudes, the objective and subjective perception of wealth and personality traits (e.g., Gasiorowska, 2015; Pilch & Górnik-Durose, 2017 ). Nevertheless, the scale has been used solely in Poland so far.

A special mention is needed for the Klontz Money Script Inventory (KMSI), conceived to assess individual’s destructive money beliefs and behaviors (Klontz et al., 2011) . The concept of a money script refers to strong beliefs developed during childhood, which are frequently unconscious and act as drivers of one’s financial behaviors. The attention given to implicit aspects is what differentiates this scale from the previous ones, which focus on explicit attitudes and motives. The instrument was created based on clinical observation of clients seeking help for financial therapy. Overall, four main factors were identified: money avoidance refers to the tendency to experience money negatively, which leads people to manage money in an ineffective and self-destructive way and is connected to distrust and anxiety attitudes; money worship refers to the belief that money can solve all problems and is related to money disorders like compulsive hoarding, overspending and pathological gambling, as well as to feelings of anxiety in dealing with money but also to a sense of power derived from it; money status script refers to those people who hold a competitive vision of money as a means to gain higher status and prestige; lastly, money vigilance refers to the belief that money is a source of shame and secrecy and it is related to a retentive and worrisome attitude (Taylor et al., 2015) . The KMSI was used to classify eight types of money disorders, giving insights for timely and effective interventions (for an overview, see Taylor et al., 2017 ). So far, the scale has been used in the US (e.g., Sholin et al., 2021; Taylor et al., 2015 ) and Pakistan (e.g., Nadeem et al., 2020 ).

There are few other (not always validated and/or less frequently employed) scales that can be mentioned for thoroughness. In their foundational work, Wernimont and Fitzpatrick (1972) used a semantic differential scale to explore emotions and meanings related to money, identifying both positive and negative affective attitudes. Forman (1987) used twenty dichotomous questions to investigate the emotional underpinnings of money, disclosing maladaptive and inconvenient approaches. Prince (1993) developed a scale to measure money beliefs (role of fate and effort in wealth, beliefs about rich people), values (importance of money and expensive goods) and emotions (personal appraisal of individual traits with respect to money). Newcomb and Rabow (1999) focused their study on how people feel in relation to money in terms of either positive or negative affect. Finally, a recent contribution was made by Franzen and Mader (2022) , who developed the Importance of Money Scale (IMS): taking partial inspiration from the factor “value importance of money” originally designed by Mitchell and Mickel (1999) , the authors developed a totally new unidimensional scale with eight items intended to measure the degree of importance attributed to money to live a happy and well-off life and also covering the dimension of material well-being. At the time of writing, the IMS has been solely used in Switzerland.

To summarize this section on the measures of money attitudes, there are several validated scales which only partially overlap and comprise diverse latent factors. Each scale has its own specificities that convert into more appropriate fields of applications. Lastly, despite the intent to study the three components of attitude (affective, behavioral, cognitive), it is worth noting that most items are worded in terms of behaviors or beliefs rather than feelings. These issues will be later resumed and debated in the discussion section.

The second aim of the present review was to offer a broad overview of the relationship between money attitudes and other variables. This section will first address demographic features, uncovering the link between gender, age, income and education with money attitudes, followed by a brief overview on macro-economic factors. Next, personality traits and ethical values will be discussed. Money management practices will follow, with a deep dive on the major financial behaviors. The section will close with a discussion on financial well-being and satisfaction and with job-associated factors.

5.1. Demographic Correlates

5.1.1. gender.

With regard to gender, the results suggest women and men have different approaches to money. Specifically, men tend to more frequently associate money with power and prestige, viewing it as a means to obtain respect, impress others and demonstrate value and status. In contrast, women are more likely to be concerned with spending and feel more anxious about money, thus experiencing their relationship with money in a more ambivalent way. Proofs of this distinction come from studies conducted all over the world, suggesting a quite homogeneous cultural agreement among studies in Europe (e.g., Furnham et al., 2012; Furtner, 2020; Pereira & Coelho, 2020; Tomek et al., 2013 ), the US (e.g., Oleson, 2004; T. L.-P. Tang, 1995; Watson et al., 2004 ), and Asia (e.g., Lim et al., 2003; Rimple, 2020 ). A few studies suggesting the same insight have been performed in South America (Denegri et al., 2012) and Africa (Bonsu, 2008) . Nevertheless, there are also few divergent studies, suggesting a tendency for women to view money as a source of power (Shih & Ke, 2014; Wilhelm et al., 1993) and for men to express anxiety while dealing with money (Bonsu, 2008; Lim et al., 2003; Rimple et al., 2015) .

Young people seem to be more obsessed with money than older people, attributing more importance and centrality to it (Furnham & Grover, 2020; N. Tang et al., 2018; T. L.-P. Tang et al., 2018a; T. L.-P. Tang, Sutarso, et al., 2008; Tomek et al., 2013) . Indeed, worries and anxiety tend to decrease with age, with older people being stronger on saving, planning and holding a long-term view on money (Bailey & Lown, 1993; Hayhoe et al., 2012; Rimple et al., 2015; Shih & Ke, 2014) . Thus, older people tend to view money in a more positive and pragmatic light, while younger people have more associations with symbolic aspects of money (such as power and freedom) and more anxiety about money (Baker & Hagedorn, 2008; Furnham, 1984; Lay & Furnham, 2019; Rousseau & Venter, 1999; T. L.-P. Tang, 1992, 1995) . However, there are few studies providing divergent results, for example finding that older people obtain lower scores on budget factors (T. L.-P. Tang, 1993) or display a stronger love of money (Maggalatta & Adhariani, 2020; T. L.-P. Tang et al., 2004) . Lastly, some studies found no connection between age and money attitudes (e.g., Pereira & Coelho, 2020; T. L.-P. Tang et al., 2000; T. L.-P. Tang & Chen, 2008 ).

5.1.3. Income

Predictably, high-income individuals tend to express lower anxiety in their relationship with money (Baker & Hagedorn, 2008; Gasiorowska, 2014; Rousseau & Venter, 1999) , while low-income people hold more positive expectations for the future and higher associations with the symbolic component of money (Bailey & Lown, 1993; Gasiorowska, 2015) . Furthermore, many studies found that income enhances individual worship of money; among these, most were conducted in the US (Luna-Arocas & Tang, 2015; T. L.-P. Tang et al., 2004, 2006; T. L.-P. Tang & Tang, 2012) , with the exception of one study conducted in Indonesia (Maggalatta & Adhariani, 2020) and the cross-cultural study by Luna-Arocas and Tang (2004) conducted in Spain and the US. However, Furnham (1984) found English people with lower income to be more obsessed with money and more likely to view it as a symbol of power; in contrast, higher-income people were more likely to believe that the ability to earn money was due to effort and ability. Also, Tang and Chiu (2003) found a negative relationship between love of money and income, suggesting that Chinese low-income people tend to attribute a central role to money as a motivator and a sign of success. Furthermore, there are also studies that showed no significant connection between such variables (e.g., Fenton‐O’Creevy & Furnham, 2020; Tung & Baumann, 2009; von Stumm et al., 2013 ). Possibly, the relationship between income level and the importance attributed to money varies according to cultural differences.

5.1.4. Education

Few studies looked at educational differences. Still, evidence suggests that better-educated people tend to associate money with power and success more often than less-educated individuals (Lay & Furnham, 2019) , who are more likely to express money-related anxiety and concerns (Dogan & Torlak, 2014; Lay & Furnham, 2019) . Also, higher levels of education appear to be connected to a stronger inclination to plan and budget (Roberts & Sepulveda, 1999a) . Nevertheless, many studies found no relationship between money attitudes and education, leaving the discussion open (e.g., Furnham & Grover, 2020; T. L.-P. Tang, 1995; T. L.-P. Tang & Liu, 2012; von Stumm et al., 2013 ).

5.2. Individual Traits

Results on the connection between money attitudes and personality traits are quite fragmented and multi-faceted. Here we aim to present an overview of the main traits for each major dimension of money attitudes: anxiety, power/status, retentive propensity, and money as evil. Last, relationship between ethical intentions and money attitudes are discussed.

5.2.1. Money as a Source of Anxiety

First, people experiencing anxiety in money-related situations tend to display higher levels of stress and impulsiveness (Norvilitis et al., 2003) , as well as higher levels of materialism (Manchanda, 2017; Pilch & Górnik-Durose, 2017) and paranoia (Yamauchi & Templer, 1982) . They also appear to have lower self-esteem (Duh et al., 2021) and to be more conscientious and neurotic than people who associate other meanings to money (Furtner, 2020; Shafer, 2000) .

5.2.2. Money as Power/status

People who view money as a sign of power, status and prestige tend to be more impulsive (Norvilitis et al., 2003) , more materialistic (e.g., Duh et al., 2021; Durvasula & Lysonski, 2010; Lemrová et al., 2014; Manchanda, 2017; Pilch & Górnik-Durose, 2017 ), less friendly (Fenton‐O’Creevy & Furnham, 2020; Furtner, 2020) , with higher self-esteem ( Prince, 1993 ; Tang et al., 2005), and more Machiavellian (Yamauchi & Templer, 1982) . Similarly, people with high levels of money obsession, money importance and love of money tend to be less emotionally stable as well as more Machiavellian (Engelberg & Sjöberg, 2007; Manchanda et al., 2017; T. L.-P. Tang & Chen, 2008) .

5.2.3. Retentive Approach

A conservative and retentive approach to money is related to a low level of materialism (Christopher et al., 2004; Lemrová et al., 2014) but also to an obsessive personality (Yamauchi & Templer, 1982) . Such people tend also to be more reserved and conscientious (e.g., Shafer, 2000; T. L.-P. Tang & Kim, 1999 ) and to have higher self-esteem (Duh et al., 2021) . The tendency to effectively budget money and see it as a source of respect is also linked to stronger competitive personality traits and higher self-esteem ( T. L.-P. Tang & Gilbert, 1995 ; Tang et al., 2002; Tokunaga, 1993 ).

5.2.4. Money as Evil

Furthermore, viewing money as evil was found to be negatively related to extraversion (Shafer, 2000) , materialism (e.g., Pilch & Górnik-Durose, 2017 ) and positively with self-esteem (T. L.-P. Tang, 1995) ; materialism is also a trait of people who feel inadequate or apprehensive in situations involving money (Christopher et al., 2004; Rimple et al., 2015) .

5.2.5. Ethical Perceptions

Lastly, attitudes toward money are also related to ethical perceptions and intentions. Generally, evidence suggests a relationship between the centrality of money and ethical intentions. Specifically, it seems that people with an inclination towards budgeting and monitoring expenses are less accepting of unethical behaviors, as well as individuals who view money as evil (e.g., Furnham, 1996; Oliveira & Marques, 2020 ). The love of money and even a higher interest in money emerge as significant predictors of unethical intentions (e.g., Chen et al., 2014; T. L.-P. Tang, 2016; Wong, 2008 ). Exceptions are Owusu, Bekoe, et al.  (2021) , who found that people with a more positive view of money are more likely to engage in ethical intentions and actions, and Singh (2018) , who proposed that only the interaction between money attitudes and spiritual orientation is able to predict consumer ethical beliefs.

5.3. Macro-economic Factors

Only few studies conducted a cross-cultural comparison in terms of money attitudes, presenting some interesting evidence concerning the role of macro-economic richness in individual attitudes towards money. Indeed, it is suggested that GDP per capita has a significant relationship with money attitudes. Specifically, people living in richer countries tend to hold lower aspirations of money and higher stewardship behavior (Furnham et al., 1994; T. L.-P. Tang et al., 2018a) . At the same time, individuals in lower GDP countries appear to be more competitive, more concerned about money and more worried about saving for the future (Furnham et al., 1996) . In other words, it seems that people in richer countries display a comparatively lower interest towards money, which on the other side is higher among individuals in poorer societies.

5.4. Money Management Practices

The relationship between money attitude and money management practices is supported by several studies. In this section we present the findings related to: compulsive buying behaviors, credit and debt habits, budgeting and monitoring practices, saving and investments.

5.4.1. Compulsive and Impulsive Buying

Several scholars attempted to study the relationship between money attitude and compulsive buying, a behavioral tendency characterized by preoccupation with buying and irresistible impulses to purchase even more than can be afforded and needed (Williams & Grisham, 2012) . Evidence indeed suggests a connection between money attitude and compulsive buying. Specifically, an individual propensity to see money as a symbol of power and status has been found to be positively connected with an impulse to buy, unveiling a tendency to use the symbolic aspects of the products to gain higher social prestige (Fenton‐O’Creevy & Furnham, 2020; Harnish et al., 2018; Khare, 2014; Norum, 2008; Pahlevan Sharif & Yeoh, 2018; Phau & Woo, 2008; Roberts & Jones, 2001; Roberts & Sepulveda, 1999b; Rose & Orr, 2007; Simanjuntak & Rosifa, 2016; Spinella et al., 2014; Veludo-de-Oliveira et al., 2014) . Also feeling distrustful or anxious in situations involving money appears to be related to higher compulsive buying, as to alleviate undesirable mood states through purchases and products (Harnish et al., 2018; Lejoyeux et al., 2011; Norum, 2008; Pahlevan Sharif & Yeoh, 2018; Roberts & Jones, 2001; Roberts & Sepulveda, 1999b; Rose & Orr, 2007; Simanjuntak & Rosifa, 2016; Spinella et al., 2014; Veludo-de-Oliveira et al., 2014) . This is in line with Workman and Lee (2019) , who found that individuals scoring high on factors of anxiety, distrust and power tend to be more willing to quickly purchase products in their early acceptance stages of the market entrance but also to experience stronger feelings of regret after a (completed or missed) purchase. Furthermore, also Furnham and Okamura (1999) , in their examination of the correlates of money pathology, found that both spendthrifts and individuals valuing money as power were more prone to negative emotions such as anger, anxiety and depression. In contrast, compulsive behavior is less common in people with retentive inclinations toward money; in other words, individuals with a tendency to plan for the future, carefully manage financial resources, and view money as a security blanket are less prone to impulsive purchases (Fenton‐O’Creevy & Furnham, 2020; Harnish et al., 2018; Roberts & Sepulveda, 1999b; Rose & Orr, 2007; Simanjuntak & Rosifa, 2016; Spinella et al., 2014; Veludo-de-Oliveira et al., 2014) .

5.4.2. Credit Behaviors

Another line of research focused on the role of money attitudes in credit behaviors. Credit usage was found to be linked to an inclination to use money as prestige and power, as well as a sign of independence (Doğan et al., 2018; Hayhoe et al., 2005; Khandelwal et al., 2021; Moore & Carpenter, 2009; Pereira & Coelho, 2019; Tokunaga, 1993) . Similarly, loans are more frequent in individuals who see money as a sign of status and power, whereas distrustful attitudes to money relate to a higher tendency to reject loans and thus to avoid debt (Doğan et al., 2018; Henchoz et al., 2019; Tomek et al., 2013) . At the same time, stronger feelings of not having enough money and of money-related anxiety lead people to more frequently rely on credit (Allen et al., 2007; Hayhoe et al., 2005; Simanjuntak & Rosifa, 2016; Tokunaga, 1993) . In contrast, individuals who are more inclined to hold a retentive attitude toward money are unsurprisingly less likely to engage in credit behaviors (Hayhoe et al., 1999; Tokunaga, 1993; Yang & Lester, 2001) . Indeed, a stronger disposition to care about and monitor money is negatively connected to indebtedness (de Almeida et al., 2021; Stone & Maury, 2006) , whereas risky borrowers tend to hold negative attitudes towards money, leading them either to refuse to use money or to emotionally spend it with no control (Ganbat et al., 2021) .

5.4.3. Budgeting and Monitoring Practices

Focusing now on convenient money management practices, the tendency to stick to a budget is not frequent in people who view money as sign of status; such individuals instead tend to buy the most expensive things to impress others and to show off their value, without paying attention to monitoring and planning (Rose & Orr, 2007; Tomek et al., 2013) . Likewise, people with an anxious attitude toward money are less likely to practice sound financial behaviors, such as making plans, budgeting, monitoring, and having written goals (Hayhoe et al., 2012) . Conversely, more retentive and distrustful inclinations positively relate to beneficial money management practices (Aydin & Akben Selcuk, 2019; Castro-González et al., 2020; Elgeka et al., 2018; Hayhoe et al., 2012; Spinella et al., 2007) . Indeed, people with a money-security attitude are more capable of managing their resources than those who do not associate money with security (Furnham et al., 2022; Rose & Orr, 2007; von Stumm et al., 2013) . Nevertheless, it is worth noting that there is a negative side of this attitude as well: frugal and retentive people tend to often experience negative worrisome moods when dealing with money (Rose & Orr, 2007) , and security minded individuals were found to be more inclined to hoarding, another pathological money management practice (Furnham et al., 2015) .

5.4.4. Investments and Donations

Regarding investments, individuals who value money as a symbol of achievement and esteem are more likely to prefer high-risk investments (Lippi et al., 2021; Shih & Ke, 2014) . Furthermore, viewing money in a positive light, the degree of importance of money and the desire to be rich turned out to be important predictors of individuals’ willingness to invest in stocks, impacting investors’ happiness and behaviors (Keller & Siegrist, 2006b; Owusu, Anokye, et al., 2021; N. Tang et al., 2018) . In contrast, money-related anxiety and viewing money as a source of security are more likely to drive investments in low-risk products (Lippi et al., 2021; Shih & Ke, 2014) . Finally, a negative view of money as shameful and evil positively relates to higher donations, which, in contrast, are not frequent for people with a retentive inclination toward money nor for individuals who have a strong attachment to it (Franzen & Mader, 2022; Ruiz et al., 2017; Tomek et al., 2013; Wiepking & Breeze, 2012) .

5.5. Financial, Job-related and Life Satisfaction

Several studies provided evidence supporting the role of money attitudes in financial satisfaction. A stronger symbolic money attitude leads to lower subjective financial satisfaction (Gasiorowska, 2015) . In other words, people who view money as symbol of power and success but also of evil, are likely to report a lower level of financial happiness. In particular, individuals who value money as a symbol of power tend to feel higher financial hardship and stress and experience adverse financial events (Fenton‐O’Creevy & Furnham, 2021; Lim et al., 2003; von Stumm et al., 2013) . Conversely, a low level of anxiety related to money increases subjective wealth while decreasing the perception of financial hardship (Dowling et al., 2009; Gasiorowska, 2014; Lim & Teo, 1997) . Likewise, a retentive attitude toward money is positively connected to financial well-being, being characterized by a careful propensity in spending and planning financial needs and by higher economic self-efficacy (Abdullah et al., 2019; Engelberg, 2007; Sabri & Zakaria, 2015) . This is in line with another body of research exploring the relationship between life satisfaction and money attitudes, confirming a positive correlation between life satisfaction and stewardship propensity and a negative relationship between life satisfaction and symbolic and affective meanings of money (e.g., power, status and freedom) (Chitchai et al., 2020; Furnham & Murphy, 2019; Inseng, 2019; Lay & Furnham, 2019; Luna-Arocas & Tang, 2004; T. L.-P. Tang, 1992; T. L.-P. Tang et al., 2018a; T. L.-P. Tang, Kim, et al., 2002) . Furthermore, a few studies found a connection between symbolic associations with money and the quality and the level of trust attributed by a client to his/her financial advisor (Lozza et al., 2022; Sholin et al., 2021) .

Money attitudes were found to play a role even in the organizational and working context. Indeed, several dimensions of money attitude are linked to lower satisfaction in different working-related domains (Chitchai et al., 2020; T. L.-P. Tang, 1995, 2007; T. L.-P. Tang & Chiu, 2003; Thozhur et al., 2006) . In particular, viewing money as evil is associated with lower satisfaction with many work-related elements, such as pay and co-workers (T. L.-P. Tang, 1992, 1995; T. L.-P. Tang, Luna‐Arocas, et al., 2005; T. L.-P. Tang, Tang, et al., 2005; T. L.-P. Tang & Kim, 1999) . In contrast, high stewardship inclination leads to higher pay satisfaction (e.g., Sardžoska & Tang, 2015 ; Tang et al., 2018).

The present systematic scoping review involved the analysis of 226 articles dealing with the topic of money attitudes, conceived as the combination of beliefs, behavioral inclinations and emotions attributed to the concept of money. Particular attention was given to the methodological aspects, outlining the instruments that have been used and validated to measure the construct, and to the content analysis, concentrating on the correlates studied in the literature. The review was useful to map a quite broad and multi-faceted body of knowledge around the topic, making it possible to identify some gaps and to share future research directions and practical implications. Figure 3 shows the integrative framework of variables connected to money attitude and the consistency among the articles analyzed in this review. Figure 4 was developed following the Theory-Context-Characteristics-Methods (TCCM) framework, systematically presenting gaps in the literature and suggestions for future research (Paul & Criado, 2020) . In the next sections, methodological implications will be first pointed out, followed by a discussion of fragmented results and understudied topics.

Figure 3.

6.1. Methods: A Critical Overview and Future Directions

In this section we will critically discuss the scales presented in this review so to outline methodological directions, as well as suggestions for future research.

6.1.1. Existing Scales and Potential Contexts of Application

From a methodological perspective, several empirically and statistically validated scales exist, and some similarities can be found among them. First, almost all scales contain some factors that are more related to a pragmatic use of money (e.g., budgeting, spending or refraining from spending, saving, credit use) and others that are more linked to symbolic and non-economic dimensions (e.g., experiencing money as status and power or as a means to stave off anxiety and express love). Furthermore, some dimensions are commonly present, such as power, success/achievement, and retention, although latent factors do not completely overlap. For instance, the anxiety factor is part of the MAS but not MBBS or MES, and MBBS contains factor security while it is absent in other scales. Hence, the fact that the scales and relative wording do not completely overlap might help explaining some divergent results (e.g., connection between money attitudes and demographics). Moreover, each scale has its own specificities and suggestions can be shared to support future researchers in their choice to select a scale to measure money attitudes ( Table 3 ).

6.1.2. Limitations of Existing Scales and Methodological Alternatives for Future Research

In terms of future directions and possible methodological improvements, it is worth noting that there is no scale which deeply investigates the emotional dimension of money. Indeed, although the affective component is frequently present in several instruments, items mostly are worded to reflect behaviors or beliefs. For instance, the factor ‘good’ in the MES includes items like “Money does not grow on trees” and “Money spent is money lost (wasted)” (T. L.-P. Tang, 1992) ; the MAS factor ‘anxiety’ includes items such as “It’s hard for me to pass up a bargain” and “I am bothered when I have to pass up a sale” (Yamauchi & Templer, 1982) ; and in the Money Types Questionnaire, thought to measure the four “money-associated emotions”, we find items such as “I have always been inspired by powerful tycoons”, “If I had enough money, I would never work again”, and “I often demonstrate my love to people by buying them things” (Furnham et al., 2012) . What is missing from these scales is the “feeling” that individuals associate with money. In fairness, some studies included the pure emotional aspect, such as Wernimont and Fitzpatrick (1972) , Prince (1993) and Newcomb & Rabow (1999) , although such scales had not been included in many subsequent studies. Also, previous research mainly focused on a restricted number of negative feelings, such as anxiety, suspicion, and stress. Nevertheless, no validated scales are available to assess specifically the network of different emotions people feel while thinking about and dealing with money. Several studies proved the role of emotions, affects and moods in financial contexts (Guiso et al., 2008; Hirshleifer & Shumway, 2003; McNair et al., 2016) . Indeed, hope, trust, faith, fear of shame and embarrassment, but also pride and optimism are just some of the emotions that come into play in the financial and economic fields (Merkle, 2007) . Thus, future research could benefit from revisions to present measures, which mainly cover the cognitive, behavioral and symbolic aspects of money. Likewise, neuro-scientific tools have proved to be effective in measuring emotional responses in different domains and might be an interesting direction to follow (McDonald, 2017) . Furthermore, it is worth considering that other methods might offer additional insights on individuals’ implicit attitudes to money (e.g., Implicit Association Test). Indeed, all existing scales take the form of self-report questionnaires, subject to social desirability effects and able to reflect only conscious self-evaluations. However, money involves a mix of meanings and symbolic associations of which people are not always aware. Additionally, given the transitory nature of emotions, longitudinal research across different settings and time periods could establish the causal relationship between such emotional dimensions of money and practical behavioral outcomes. Longitudinal studies might also be appropriate to understand whether people change their money attitudes over time and explore the variations during the life cycle, observing when the change happens, and what variables influence the change (e.g., variations in the income level).

Another methodological issue is that most of the papers present quantitative studies. In contrast, we believe that a qualitative approach could produce additional insights on the relationship between money attitudes and practical behaviors. Indeed, as highlighted by Hayhoe et al.  (2012) , people could follow diverse pathways in the construction of their approach to money, and divergent events might have been key to develop their relationship with financial resources, either in a positive and negative way. Questions like these might be more deeply investigated by means of interviews and focus groups rather than through surveys or experiments. Lastly, research on money attitude would also need to connect behavioral data (e.g., from bank accounts) to self-report data (Furnham & Okamura, 1999) . Indeed, all validated scales rely on self-report answers, which are widely used in social sciences and provide fundamental insights on people’ minds. However, the link between subjective data and behavioral information might further contribute to the understanding of the impact of money meanings and beliefs.

6.2. Money Attitudes and Correlates: An Integrative Framework and Research Directions

The analysis of correlates depicted a quite heterogeneous and complex frame of interrelations between money attitudes and demographics, economic factors, individual traits, financial practices, satisfaction, and contextual factors. In this section two possible explanations of the fragmentation of results are presented, concerning methodological and societal motives, and related future research directions. Next, some considerations about under-studied topics will be discussed, focusing on dysfunctional financial behaviors and predictors of money attitudes.

6.2.1. A Discussion on Fragmented Results

Starting with the fragmentation of results, it is worth considering that evidence for gender and age is quite consistent, outlining a distinction between the money-related perspectives adopted by men and women and by younger and older people. On the contrary, the role of education in the formation of money attitudes deserves more attention, to comprehend whether and how higher training on financial aspects might be beneficial to the development of an appropriate and balanced money mindset. Furthermore, also the connection between the degree of importance attributed to money and income is still to be further explored. Indeed, research suggests that people with lower income attribute either more or less importance to money than individuals from higher social classes. Some hypotheses can be elaborated to explain such inconsistent results, pertaining to methodological and/or societal motives. As concerns the methods, divergent findings in the relationship between demographics and money attitudes can be attributed to the limited overlap among scales. For instance, studies looking at educational differences used scales meant to highlight different aspects of money attitudes. Indeed, among the studies obtaining no correlation between money attitudes and education levels, Tang (1995) and Tang and Liu (2012) employed MES and LOM, mostly used to study the relationship between money and ethics; Furnham and Grover (2020) adopted a scale mostly composed by behavioral items; in Von Stumm and colleagues (2013) the Money Types Questionnaire was included, meant to investigate symbolic aspects of money although with some reliability issues. On the other hand, findings about a significant relationship between education and money attitudes employed measures addressing symbolic meanings of money and behavioral inclinations ( Dogan & Torlak, 2014; Lay & Furnham, 2019 ; Roberts & Sepulveda, 1999). Therefore, it might be that divergent results are driven by methodological specificities of employed scales. This also relates to the complexity of the construct “money”, which is imbued of strong and heterogeneous symbolic charges, which make it difficult to investigate and interpret.

As above-mentioned, a second possible reason behind fragmentation of results refers to social, cultural, economic, and historic factors. In fact, only 8% of studies included in this review involved a cross-cultural perspective: those provide more consistent results, suggesting a tendency in poorer countries to display more interest towards money compared to richer societies. It is feasible that people from different parts of the world value money differently, and thus cultural differences and macro-economic variables might lay behind such inconsistent results (as testified by the very limited number of studies investigating the connection between GDP and money attitudes – see section 5.3). Indeed, since money is a social object, laden with psychosocial, cultural and economic history, the attempt to identify “universal” correlates to attitudes toward money is by definition impossible: attitudes toward money will bind differently to the same variables in different socioeconomic and cultural contexts. Therefore, future cross-cultural research might be able to provide further insights on money attitudes in different cultural and socio-economic contexts.

To assess such hypotheses, further research should focus on single correlates of money attitudes (e.g., on money attitudes and age or on money attitudes and education levels). Indeed, the aim of the present study was to offer a first overview of the literature concerning money attitudes. Future studies should systematically investigate the connection between this construct and its correlates. For instance, gender differences in money attitudes and behaviors have been the subject matter on another systematic review, outlining precise possible interpretation behind fragmented findings (Sesini et al., revised and resubmitted) .

6.2.2. Understudied Topics about Money Attitudes

To conclude this section, two additional contexts of investigation should be considered.

First, besides compulsive buying (investigated by only 7% of studies), the relationship between money attitudes and dysfunctional financial practices (e.g., hoarding, overspending, excessive deposits in bank accounts) is a rarely investigated but promising field, considering the connection between money attitudes and financial behaviors. Indeed, it is true that holding a power-money mindset and being more subject to negative feelings of anxiety more often lead to unsound financial behaviors, such as indebtedness and compulsive buying (e.g., Fenton‐O’Creevy & Furnham, 2020; Khare, 2014 ). However, evidence also adds that a downside exists for a security-money and retentive approach, which may result in excessive and irrational hoarding (Furnham et al., 2015) . Thus, further research is necessary to shed light on the backfires of apparently positive attitudes towards money.

Second, it is clear that individual money meanings and beliefs permeate various aspects of people’s lives, from financial well-being and behaviors to life and work satisfaction. Nonetheless, still little is known about the determinants of money attitudes. What determines the formation of specific money attitudes? What is the process behind the development of one’s relationship with money? To respond to such questions, foundational predictors and events might be further explored to better comprehend the formation process of money attitudes (T. L.-P. Tang et al., 2004) . In this context, qualitative research might be a powerful approach to investigate those aspects, enabling to go beyond the limits set by quantitative approaches and exploring the link with other constructs (e.g., implicit attitudes, social representations).

6.3. Practical Implications

In terms of implications, several suggestions can be derived from the present scoping review.

First, the results analyzed in the present review shed light on the importance of considering how money attitudes might lead to problematic financial behaviors. A higher awareness of such risk predictors should be raised so as to reinforce the development of more sustainable financial habits.

Second, research on money attitude provides useful insights in terms of segmentation of both customers and employees. Indeed, several papers highlighted the interconnection between money mindset and work-related factors, such as ethical behaviors, job commitment and pay satisfaction. A good understanding of such dispositional factors might allow employers and managers to make predictions concerning employees’ behavior in organizations and understand the factors motivating employees, given that money can represent either a positive reinforcement or no reinforcement at all (Monteiro et al., 2015) . Regarding the application in the consumer insight area, marketing practitioners could better segment markets and fine-tune products and services based on money attitudes, tailoring investment products and developing customized strategies (e.g., in fundraising campaigns, retention-minded people might be more responsive to messages framing donation as an investment rather than an expense, so as to minimize their perception of loss (Wiepking & Breeze, 2012) ).

Another fundamental aspect to discuss is the promotion of consumer education. From an early age, people should be trained in proper financial planning and money management practices, as widely defended in the literature (e.g., Li et al., 2009; Pahlevan Sharif & Yeoh, 2018; Phau & Woo, 2008 ). Moreover, developing a secure and adaptive approach to money would be beneficial in the formation of financial habits, and increasing people’s awareness of the assumptions behind their beliefs about money is an initial step towards the construction of more appropriate beliefs (Dowling et al., 2009) . The design of financial training programs and public policies can support citizens’ education, insisting on the need for carefully handling the household budget, managing emotions in financial contexts, and endorsing the appreciation of money as a tool to acquire basic needs and peacefulness rather than as an expression of power and status (Atalay & Meloy, 2006; Lemrová et al., 2014) .

Lastly, given the role of money attitudes in determining financial satisfaction and well-being, understanding clients’ money attitudes can be a critical step in building a more successful relationship with clients, since unconscious differences in money attitudes between advisor and client can develop potential conflict situations while the ability of an advisor to comprehend clients’ symbolic meaning of money can enhance the quality of the relationship (Lozza et al., 2022; Oleson, 2004; Sholin et al., 2021) .

Our systematic scoping review is not without limitations. First, although we developed a search string based on past literature around money attitudes and we relied on four different databases, it is possible that some pertinent studies were not included. Moreover, we decided to focus on individuals rather than couples and households, since the latter involves complex and multifaceted dynamics which would require special attention to address. Furthermore, only studies published in English were analyzed, excluding research available in other languages.

Money is a powerful and emotionally charged element that affects people’s daily lives at multiple levels. As it turned out in the present review, it is a profoundly difficult concept to study. The current study aimed to systematically review the scientific knowledge around the construct of money attitudes. Specifically, our aim was to cover both a methodological perspective, outlining how attitude to money has been measured, and the analysis of contents, pinpointing the connections between money-related beliefs, opinions and feelings and a number of variables (i.e., demographics, personality traits, values, macro-economic factors, financial practices, personal satisfaction and job-related factors). Through a comprehensive review of 226 scientific papers, the psychology of money attitudes was confirmed to be a rich and fertile research field, demonstrating the key function of a psychological approach to money in many fields of application. The review outlines the existence of several validated scales to measure money attitudes, partially overlapping and with distinctive features making each one of them unique. Therefore, we propose possible elective contexts of applications for each scale. We also outline several directions for future research, suggesting the need to study emotional aspects of money, predictors of money attitudes and unsound financial practices, and methodological advancements (e.g., neuroscientific tools, IAT, qualitative approach, longitudinal studies). Furthermore, we develop hypotheses behind inconsistencies in evidence to be tested in future research. Fragmented results are indeed found in the interrelations between money attitudes and its correlates, which is a fertile ground of study for future focused reviews. Finally, we propose suggestions to support marketing practitioners, financial advisors, policymakers, and organizational contexts.

All authors made substantial contributions to the conception of the work and to the design of the research. GS performed the formal analysis, data curation and wrote the original draft. EL supervised the overall research, contributed to the analysis, revised the draft critically, and provided final approval of the version to be published. All authors agreed to be named on the author list and approved the full author list.

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The Psychology of Money: How Your Mindset Affects Your Finances

The psychology of money examines the intricate connection between our attitudes, behaviors, and beliefs around money. Our potential to attain financial success and stability can be impacted by how we see money, which can affect the way we make financial decisions. Our psychological proclivities may have a big impact on our financial life, from restricting money attitudes to unconscious spending patterns. We may overcome limiting ideas, form wholesome financial habits, and eventually reach our financial objectives by comprehending the psychology of money and creating a positive money attitude.

Our financial life are greatly impacted by the way we see money. How we earn, spend, save, and invest money can be influenced by our attitudes and views about money. This is why it’s so crucial to comprehend the psychology of money.

This essay will examine the relationship between your thinking and your financial situation and will include analysis from books and the life and business coach Alma Jansen.

The Impact of Your Money Mindset

Your financial decisions are influenced by the ideas, attitudes, and behaviors that make up your money mentality. It influences how you view money and the part it plays in your life.

The cornerstone of your financial success is your thinking, says life and business expert Alma Jansen. It influences your financial decisions, including how much you spend, save, and invest.

Positivity about money might prevent you from becoming financially successful. For instance, you can unconsciously forgo opportunities to earn more money or increase your savings if you think that money is the source of all evil or that you’ll never be affluent.

However, if you have a successful money attitude, it can help you advance financially. You’re more inclined to take activities that support your ideas if you think you can attain financial independence or that money can help you live the life you desire.

The Role of Beliefs and Values

Our beliefs and values have a significant impact on how we think about money. They may affect our financial choices without our knowledge since they are firmly ingrained.

For instance, if your family was financially unstable growing up, you could have internalized ideas like “money is scarce” or “I’ll never have enough money.” These ideas might make you think that you need to save money and refrain from spending it, which can result in a scarcity mindset.

Alternately, if you grew up in a home that emphasized fiscal discipline and stability, you could have internalized ideas like “saving is important” or “investing in your future is important.” These ideas can foster a development mentality, in which you’re more inclined to invest in your future and take sensible risks.

Your beliefs and values are the cornerstone of your financial thinking, according to Alma Jansen. Examine and question your views and ideals towards money if you wish to alter your financial status.

Developing a Growth Mindset

It’s crucial to have a development attitude if you want to be financially successful. Adopting attitudes and ideas that promote financial success and growth is required for this.

Focusing on abundance rather than lack is one method to cultivate a development mentality. Focus on possibilities to earn and save more money rather than holding the notion that money is hard to come by and scarce. “When you focus on abundance, you’ll start to see opportunities that you didn’t see before,” says Alma Jansen. You’ll begin to come up with original ideas on how to increase your income or your savings.

Another way to develop a growth mindset is to cultivate a sense of gratitude. When you appreciate what you have, you’re less likely to feel like you need more. This can help you avoid unnecessary spending and focus on what’s truly important.

Alma Jansen recommends taking time each day to reflect on what you’re grateful for. “It can be as simple as writing down three things you’re grateful for each day. This can help shift your mindset towards abundance and positivity.”

Overcoming Limiting Beliefs

To achieve financial success, it’s important to identify and overcome limiting beliefs that may be holding you back. Limiting beliefs are beliefs that limit your potential and prevent you from taking action towards your goals.

Common limiting beliefs around money include:

“Money is the root of all evil”

“Rich people are greedy and selfish”

“I’ll never be wealthy”

“Money can’t buy happiness”

These beliefs can hold you back from taking actions that align with your financial goals. For example, if you believe that money is the root of all evil, you may subconsciously avoid opportunities to earn more money or invest in your future.

To overcome limiting beliefs, Alma Jansen suggests asking yourself questions such as:

“Where did this belief come from?”

“Is this belief based on facts or assumptions?”

“What evidence do I have to support this belief?”

By challenging your limiting beliefs, you can start to shift your mindset towards a more positive and empowering perspective.

Developing Healthy Financial Habits

In addition to mindset, developing healthy financial habits is also crucial for achieving financial success. Healthy financial habits include things like budgeting, saving, and investing.

According to Alma Jansen, “Healthy financial habits are the building blocks of financial success. They help you stay on track and make progress towards your goals.”

One healthy financial habit is budgeting. A budget is a plan for how you’ll allocate your income towards different expenses. It can help you identify areas where you may be overspending and make adjustments to save more money.

Another healthy financial habit is saving. Saving involves setting aside a portion of your income towards a specific goal, such as an emergency fund or a down payment on a house. It can help you build financial stability and prepare for unexpected expenses.

Investing is another healthy financial habit that can help you grow your wealth over time. According to Alma Jansen, “Investing is a powerful tool for building wealth. It allows your money to work for you and grow over time.”

Insights from Related Books

There are many books that provide insights into the psychology of money and how to develop a healthy money mindset. Here are a few related insights:

“The Psychology of Money” by Morgan Housel explores the role of psychology in shaping our financial decisions. It emphasizes the importance of developing a healthy relationship with money and focusing on the long-term.

“Rich Dad Poor Dad” by Robert Kiyosaki challenges traditional beliefs around money and offers a different perspective on wealth-building. It emphasizes the importance of financial education and taking calculated risks.

“The Millionaire Mind” by Thomas J. Stanley explores the habits and beliefs of millionaires. It emphasizes the importance of hard work, discipline, and a positive mindset.

The psychology of money plays a significant role in our financial lives. Our beliefs, attitudes, and habits around money can impact our financial decisions and ultimately determine our financial success.

To develop a healthy money mindset, it’s important to challenge limiting beliefs, focus on abundance, and cultivate gratitude. Developing healthy financial habits, such as budgeting, saving, and investing, can also help you achieve financial success.

As Alma Jansen notes, “Your money mindset is within your control. By changing your mindset and developing healthy financial habits, you can achieve financial freedom and create the life you want.”

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Psychology of Money - Research Paper Example

Psychology of Money

  • Subject: Psychology
  • Type: Research Paper
  • Level: High School
  • Pages: 6 (1500 words)
  • Downloads: 2
  • Author: carmelahirthe

Extract of sample "Psychology of Money"

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