Book Review: The Psychology of Money

Capital Structure Planning & Strategy

Investing, personal finance, and business decisions are typically taught as a math-based field, where data and spreadsheets dictate your family business’ next move. But as Morgan Housel teaches us in his book The Psychology of Money, there is theory, and then there is reality. As my colleague Atticus Frank writes in a previous post, most financial literature focuses on one of three areas:

  1. Help, I have a problem! Think Dave Ramsey.
  2. How do I get more money? This includes The Millionaire Next Door and other investing books.
  3. How do I learn more? Consists of deep dives into REITS, stock selection, or portfolio construction.

Housel goes a different route. He challenges the very idea of how money is taught and perceived by suggesting that financial decisions are not made only on a spreadsheet. In this week’s post, we explore a few of the lessons Housel identifies to challenge how people think about money.

“Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.”

You want to talk about luck? Bill Gates went to one of the only high schools in the world with a computer. In 1968, there were 303 million high-school-aged people in the world. About 18 million lived in the U.S., roughly 270,000 lived in Washington state, a little over 100,000 lived in the Seattle area, and only about 300 of them attended Lakeside School. Start with 303 million, end with 300.

Unfortunately for one of Gates’ childhood friends, he experienced a powerful dose of luck’s close sibling, risk. Kent Evans was a buddy of Bill’s in 8th grade, and the two had big dreams together. Unfortunately, Kent died in a mountaineering accident before he graduated high school. Housel writes that the odds of being killed on a mountain in high school are roughly one in a million.

Bill experienced one-in-a-million luck as Kent experienced one-in-a-million risk—the same force and magnitude working in opposite directions. If it has been around for a while, your family business has likely enjoyed fortune’s blessings and curses.

The difficulty for family businesses in applying lessons from past wins (and failures) is identifying what is luck and what is skill. Skill is replicable, luck is difficult to repeat. But Housel offers two rules to point you in a better direction.

Rule #1 – Be careful who you praise and who you look down upon. We naturally want to assume that 100% of outcomes can be attributed to the effort and skill of the decision-makers, but this is just not the case. Luck and risk have a lot to do with the outcomes we observe.

Rule #2 – Focus less on specific individuals and more on broad patterns. Studying the experiences and practices of a specific person can be dangerous as we naturally tend to select extreme examples as case studies—Elon Musk, Warren Buffett, etc. However, the more extreme the outcome, the more likely it was influenced by extreme ends of luck or risk, which means the example is less likely to be meaningful in the long run.

The objective for family businesses is that success and failure can sometimes be lousy teachers. Failure (and success) can blur the distinction between good processes and outcomes. Your process may have been appropriate, but probabilities still went against you. And on the flip side, you may have generated a fantastic outcome utilizing a faulty process. The trick is to distinguish your procedures and processes from the ultimate outcome.

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

Long-term financial planning is essential, but things change—both the world around you and your goals and desires. Charlie Munger, vice chairman of Berkshire Hathaway, says the first rule of compounding is never to interrupt it unnecessarily. Housel responds, “But how do you not interrupt a money plan – career, investment, spending, budgeting, etc. – when what you want out of life changes?” There is no easy solution to this conundrum.

Two things Housel suggests keeping in mind when making long-term decisions:

Lesson #1 – Avoid the extreme ends of financial planning.

Lesson #2 – Accept the reality of changing our minds.

Compounding works best when you can give a plan years or decades to grow. Endurance is key. Aiming for the moderate rather than the extreme increases the odds of being able to stick with a plan.

The goals of a family business one year may vary from the last and the next. As these goals change, family business directors have to alter their decision-making in order to accomplish these new goals. Accepting the reality of new objectives and actively making decisions based on them are key for family businesses.


In our family business advisory practice at Mercer Capital, we help clients navigate the intersection of family issues and business realities. Family businesses have multiple objectives that include and extend beyond dollars and company success.

Successful family business directors recognize the role of luck and risk in success and failures, are adaptable, and make alternate operational decisions based on changing goals. Housel’s book does a nice job of expanding on these themes and can be an excellent addition to your family business library.