The Psychology of Money — Personal Finance Tips for Ordinary People

Source: CITIC Press

When I was in college, I worked as a valet at a high-end hotel in Los Angeles.

I had a regular customer who was a tech executive. He was a genius, having designed a core component in wireless routers and filed a patent in his twenties. He had founded and sold several companies. You could say he was a very successful person.

His relationship with money, in my view, was a complex mix of insecurity and childish foolishness.

He carried around a stack of nearly 4 inches thick in $100 bills. He would show this money to everyone, regardless of whether they were interested. He would also boast about his wealth loudly and openly, especially when he was drunk, often without any reason.

One day, he gave a colleague several thousand dollars and told him, “Go to the jewelry store on the street and buy me some gold coins worth $1,000 each.”

An hour later, when the executive received the gold coins, he and his friends went to a pier overlooking the Pacific Ocean. They began to skip these gold coins like stones. They laughed and argued about who could throw them further. This act was purely for their amusement.

A few days later, he broke a lamp in the hotel restaurant. The manager told him that the lamp was worth $500 and that he needed to pay for it.

“You want me to pay $500?” the executive asked incredulously, pulling out a brick-thick stack of cash from his pocket and throwing it at the manager, “Here’s $5,000, now disappear from my sight. Don’t insult me with such things.”

You might wonder how long such behavior could last. The answer is, “Not long.”

I heard a few years later that this guy went bankrupt.

An important premise of this book is that financial success is not closely related to your IQ, but is closely related to your behavior habits. Behavior is difficult to teach, even to those with high IQs.

A genius who cannot control his personal emotions may trigger financial disasters, but conversely—ordinary people without professional financial education can also become wealthy through good behavior habits that are unrelated to IQ measures.

My favorite first sentence from a Wikipedia entry is as follows:

Ronald James Read, an American philanthropist, investor, janitor, and gas station attendant.

Ronald Read was born in rural Vermont. He was the first in his family to graduate from high school. Even more astonishing, he had to hitchhike to school every day.

For those familiar with Ronald Read, there isn’t much worth mentioning about him. His life was always ordinary.

Read worked as a mechanic at a gas station for 25 years and then spent 17 years sweeping floors at JCPenney. At 38, he bought a two-bedroom house for $12,000, where he lived out the rest of his life. His wife passed away when he was 50, and he never remarried. One of Read’s friends recalled that his biggest hobby was chopping wood.

Read passed away in 2014 at the age of 92. At that moment, this ordinary janitor from the countryside made headlines around the world.

In 2014, 2,813,503 Americans died. Of them, fewer than 4,000 had net financial assets exceeding $8 million at the time of their death, and Read was one of them.

In his will, the former janitor left $2 million to his stepchildren and donated the remaining $6 million to local hospitals and libraries.

Those who knew Read were puzzled. Where did he get so much money?

In the end, people found that Read’s wealth had no secret source. He didn’t win a large lottery, nor did he inherit a fortune. Read saved every penny he could and then bought blue-chip stocks, followed by a long wait. Decades later, these small savings compounded through interest to eventually snowball into over $8 million.

His journey from janitor to philanthropist was that simple.

Just months before Ronald Read passed away, a man named Richard also made headlines.

Richard Fuscone had everything Ronald Read did not. Fuscone graduated from Harvard University with an MBA and held a management position at Merrill Lynch. You could say Fuscone’s career in finance was very successful, allowing him to retire in his 40s and become a philanthropist. Merrill’s former CEO, David Komansky, praised Fuscone, saying he had “exceptional business insight, outstanding leadership abilities, excellent judgment, and integrity.” Crain’s named him one of the “40 Under 40 Successful Business People.” However, what happened next was just like the experience of that tech executive who skipped gold coins—everything was destroyed.

Around 2005, Fuscone heavily borrowed to expand his nearly 17,000-square-foot mansion in Greenwich, Connecticut. The house had 11 bathrooms, 2 elevators, 2 swimming pools, and 7 garages. The monthly maintenance costs alone were $90,000.

Then, in 2008, the financial crisis hit.

This financial crisis affected nearly everyone, and Fuscone was no exception; his financial assets turned to dust. High debt and illiquid financial assets led him to bankruptcy. “I currently have no source of income,” he reportedly told the bankruptcy judge in 2008.

First, the mortgage redemption rights to his house in Palm Beach were canceled.

By 2014, his mansion in Greenwich faced a similar fate.

Five months before Ronald Read donated his fortune to charity, Richard Fuscone’s home—recalled by guests as “an inspiring place where one could drink and dance on a transparent floor overlooking an indoor swimming pool”—was foreclosed and auctioned for 75% less than the insurance company’s valuation.

Ronald Read was patient, while Richard Fuscone was full of greed, which was the fundamental reason that leveled the vast differences in their educational backgrounds and financial experiences.

The reason I mention all this is not to suggest that we should learn more from Ronald and avoid repeating Richard’s mistakes—though that advice isn’t wrong.

The most fascinating aspect of these stories is that they only happen in the realm of investing and finance.

In what other field can someone who has never attended college, received training, has no background or professional experience, and no social connections overwhelmingly defeat someone who has received the best education and professional training, and has a powerful network?

I can’t think of a second one.

It’s hard to imagine that if Ronald Read were to undergo heart transplant surgery, he would do better than a trained doctor from Harvard Medical School; you can’t imagine that if Ronald were to design a skyscraper, his design skills would surpass those of experienced architects; and it’s even less likely that a janitor would outperform a world-class nuclear engineer in the field of nuclear physics.

However, such things happen in the field of investing and finance.

Regarding the coexistence of these two extreme cases of Ronald Read and Richard Fuscone, people have proposed two explanations: one is that the outcomes of finance often depend on luck, unrelated to intelligence and effort. This statement is correct to some extent and will be discussed in detail later in this book. The other (which I think is the more common reason) is that financial success is not a hard science, but a soft skill—how you do it is more important than how much knowledge you possess.

I refer to this soft skill as “the psychology of money.” The purpose of this book is to convey through small stories that in financial matters, soft skills are more important than technical abilities. I will help everyone—from Read to Fuscone, including everyone in between—make better financial decisions.

I gradually realized that these soft skills are vastly underestimated.

Financial knowledge is often built on mathematics. You need to plug data into formulas, and then the formulas will tell you what to do, and mainstream views hold that you need to follow them.

This is indeed the case in personal finance. People will tell you that you need to have six months of emergency funds and save 10% of your monthly salary.

It’s the same in investing. We know the precise historical correlation between interest rates and valuations.

The same applies to corporate finance. CFOs can accurately estimate the cost of capital.

I’m not saying this to judge the rightness or wrongness of it, but to tell you that knowing what to do doesn’t mean that when you actually do it, your mind can operate entirely based on your knowledge.

There are two things that affect everyone, regardless of whether you are interested in them—health and money.

The healthcare industry is a great achievement of modern science, and now life expectancy is increasing worldwide. Scientific discoveries have repeatedly overturned old notions doctors had about how the human body works, so almost everyone has become healthier.

However, in the field related to money—investing, personal finance, business planning—the situation is entirely different.

Over the past 20 years, the financial industry has attracted the smartest individuals from the world’s top universities. Ten years ago, financial engineering was the most popular major at Princeton’s engineering school. So, is there evidence that all this has made people better investors?

I have yet to find any.

Over the past few thousand years, human society has become better agricultural workers, more professional electricians, and chemists with more advanced knowledge through collective trial and error, but has repeated trial and error made us better financial managers? Have we reduced our likelihood of going into debt? Have we raised our awareness of saving for emergencies? Are we preparing for retirement earlier? Do we have a realistic understanding of the relationship between money and happiness?

To this, I have not yet found compelling evidence.

I believe the main reason for this phenomenon is that our way of thinking about and learning finance resembles studying physics (which involves many laws and principles) rather than studying psychology (which focuses on emotions and their subtle changes).

For me, this is the most important and fascinating aspect.

Money is everywhere. It affects everyone and leaves many feeling perplexed. People have different ideas about finance. Knowledge and experience about money can be applied to many other issues in life, such as risk, confidence, and happiness. Few other things can magnify understanding of why people act in certain ways like money does. You could say that human behavior regarding money is one of the greatest performances on Earth.

My understanding of the psychology of money has gradually formed over the past decade through writing on related topics. I began writing articles on finance in early 2008. It was just before the financial crisis erupted, marking the darkest moment of the economic recession in the past 80 years.

To accurately convey what was happening, I first needed to clarify the situation, but after the financial crisis erupted, the first lesson I learned was that no one could accurately explain what had happened or why it all occurred, let alone how to deal with it. Every seemingly reasonable explanation always faced rebuttals from equally persuasive explanations.

Engineers can determine why a bridge collapses because when the stress on a specific area exceeds a certain critical value, the bridge will break. This is an accepted fact. Physical phenomena do not spark controversy because they must adhere to physical laws. Financial phenomena, however, differ as they are determined by human behavior. What makes sense to me may be incomprehensible to you.

The deeper I studied the financial crisis and the more I wrote, the more I realized that to better understand it, one should approach it from psychological and historical angles rather than just finance itself.

To understand why people become burdened with debt, you do not need to study bank interest rates; you should study the history of human greed, insecurity, and optimism; to understand why people sell stocks at the lowest points of a bear market, you should not analyze future expected returns from a mathematical perspective, but rather consider the agony an investor feels when facing their family, contemplating whether their investment decisions will jeopardize their future.

I really like a quote from Voltaire: “History never repeats itself, but humans always make the same mistakes.” This statement especially applies to our financial behaviors.

Basic Information

**
**

Book Title: The Psychology of Money (Fully Revised Edition)

Author: Morgan Housel

Translator: Julia

Price: $58.8

Publication Date: April 2026

Format: 32mo

Pages: 312

Print Size: 9.75

ISBN: 978–7–5217–8503–6

Content Summary

Money is a crucial subject that everyone must deal with in life.

The essence of finance is not studying finance itself, but studying how people interact with money.

The key to wealth and preserving wealth lies not in how much financial knowledge you understand, but in how you overcome human weaknesses and recognize the true nature of how money works.

In “The Psychology of Money (Fully Revised Edition),” Morgan Housel shares 22 straightforward lessons about wealth with a simple and humorous touch, incisively dissecting the underlying logic of the money world. The book addresses the practical question of “how to make money” while also responding to the deeper need of “how to interact with money.” In uncertain times, it inspires ordinary people to make wiser financial decisions and gain the gifts of time.

Additionally, in the new edition, the author has significantly expanded the content.

If you are a finance novice, you will receive a simple, concise lesson on finance that will benefit you for a lifetime. If you are a seasoned investor, this book will help you fill in the gaps, return to the basics, and safeguard your hard-earned wealth.

Author Introduction

Morgan Housel

Partner at The Collaborative Fund, bestselling author, and columnist for The Wall Street Journal. He won the Sidney Award from The New York Times, received the Best Business Writing Award from the American Society of Business Editors and Writers twice, and was nominated for the Gerald Loeb Award for Distinguished Business and Financial Journalism twice.

He is the author of “The Art of Money” and “Behavioral Finance,” which sparked discussions on topics like money, human nature, and happiness. “The Psychology of Money” has been selected as one of Douban’s 2023 Annual Business and Management Books, with global sales exceeding 10 million copies.

Table of Contents

Foreword: The Greatest Performance on Earth

1. No One Really Loses Their Mind Over Money

Your personal experiences with money may constitute only a tiny fraction of all relevant experiences in the world, yet they may determine 80% of your understanding of how the world works.

2. Luck and Risk

Nothing is really as good as it seems, nor is anything as bad as it seems.

3. Never Being Satisfied

The hardest financial skill to master is learning to let the pursuit of profit stop at the right point.

4. The Secret of Compound Interest

Of Warren Buffett’s $84.5 billion net worth, $81.5 billion was earned after he turned 65.

Our patterns of thinking make it hard to comprehend what seems so “absurd.”

5. Getting Rich and Staying Rich

The key to wise investing is not making the best decision every time but consistently avoiding major mistakes.

6. A Few Events Drive Most Outcomes

Even if you make mistakes half the time, you could still accumulate enormous wealth.

The tail effect determines everything.

7. Freedom

Time freedom is the biggest dividend that money can bring you.

8. The Luxury Car Paradox

No one will care about your possessions as much as you do.

9. Wealth is What You Don’t See

Flaunting wealth is the fastest way to become poor.

10. Saving

The only factor you can control can determine a few important things in your life.

How wonderful that is.

11. Being Reasonably Rational is Better than Being Absolutely Rational

Pursuing rough rationality often yields better results than pursuing absolute rationality.

12. Unexpected Events Drive Change

History is a study of change, yet ironically, people often use it as a tool for predicting the future.

13. Room for Error

The most critical part of any plan is to have a backup plan for when things do not go as expected.

14. No One Stays the Same

The difficulty in achieving long-term plans arises because people’s goals and desires constantly change over time.

15. There Ain’t No Such Thing as a Free Lunch

Everything has a price, but not all prices are clearly marked.

16. “You Should Buy This Stock”

Beware of financial advice from those who don’t play by your rules.

17. The Temptation of Pessimism

Optimism is like a smooth-talking salesman, while pessimism is like a genuinely helpful friend.

18. There’s Always a Beautiful Story

The more you desire something to be true, the more likely you are to believe exaggerated stories about its possibilities.

19. Hold on to Your Beliefs, but Be Flexible in Your Holdings

Times change, and they always will.

To become a better investor, you need to possess three key traits.

20. The Power of Perseverance

If you hope to achieve the greatest investment returns in your lifetime, the smartest strategy is often not to maximize annual returns, but to focus on those “pretty good” returns that can sustain over the long term.

21. 14 Tips for Making Wise Investments

Concise and actionable.

22. Simple Financial Plan

How I personally apply the psychology of money.

Appendix: A Brief History of the American Consumer Mindset

Acknowledgments

References

Sample Chapter