Today, I bring you Morgan Housel’s The Psychology of Money. Housel is not only a renowned American financial columnist but also a partner at the well-known venture investment firm Collaborative Fund. This book has sold over 4 million copies worldwide and became the top‑selling personal finance title on Amazon in the United States.
The book carries a somewhat lengthy subtitle: “Timeless lessons on wealth, greed, and happiness” Though it may sound cliched, it points to a crucial factor we must consider when pursuing wealth—namely, the relationship between wealth and human nature. No matter how abstracted or omitted, human nature cannot be removed from the first principles of wealth. Knowledge about wealth comes not only from traditional finance but also delves into psychology—giving rise to behavioral finance, which is now a sub-discipline of finance, and several economists have won Nobel Prizes for related research.
Now, let us begin your journey into the “first principles of wealth” with The Psychology of Money.
I. What Is a First Principle?
First off, someone might ask: what exactly is a “first principle”? The term itself isn’t new—ancient Greek philosopher Aristotle once said, “In every system, there is one most basic proposition that cannot be violated or removed.” That is “first principles thinking.” Recently, however, thanks to Silicon Valley’s Tony Stark—Elon Musk—the term “first principles” has become a household phrase in China. It has grown in popularity, especially among entrepreneurs and university students.
Musk has often emphasized that he applies Aristotle’s “first principles” to break through traditional frameworks. The core of his success lies in breaking down complex problems into their fundamental physical or economic elements. Among Musk’s success stories is the revolutionary reduction of battery costs in electric vehicles.
Compared to gasoline-powered cars, the core of an EV is its energy storage unit—the battery and related motor systems. The high cost of batteries has long been a critical expense. Typically, battery costs account for about 40% of an EV’s total cost, with motors and control systems making up around 10%. In 2010, EV battery pack costs stood at about $1,000 per kilowatt‑hour.
So, how did Musk bring these costs down? Through first‑principles thinking, Musk reconceptualized the matter: batteries consist of cobalt, nickel, aluminium, graphite, lithium—and at commodity market prices, they should cost much less than what consumers pay. The price increase results from redundant supply chains—middlemen, packaging processes, brand premiums. As a result, Tesla implemented a major battery overhaul: building a Gigafactory in Nevada in partnership with Panasonic, vertically integrating raw material procurement and production, optimizing battery architecture to reduce parts and assembly costs, and collaborating with China’s CATL. By 2023, Tesla’s battery costs had dropped to $97/kWh—just one‑tenth of the 2010 price—allowing the Model 3 in China to start at ¥260,000–¥300,000. This helped make it the world’s best‑selling EV. Tesla alone captured nearly one‑fifth of the global pure EV market that year.
However, while “first principles” may sound easy in theory, applying it in practice—especially to help individuals truly create and accumulate wealth—is a major challenge. One chief obstacle is that Chinese thinking tends to rely on induction, not deduction. In short, we are comfortable “crossing rivers by feeling stones”—learning by trial and error, and reflecting afterward—but we are less adept at starting from basic principles to derive new systems or products. As a result, many copycat the same methods, leading to fierce, low‑return competition—“involution.” In wealth accumulation and investment, this entails wasted years, costly mistakes, or even being “plucked like chives.” Is this diligence, or strategic laziness? Some say that tactical hard work often obscures strategic laziness—and that’s about the gist.
So, does making money mean the job is done? Not necessarily. If you haven’t built your own investment and wealth‑management system based on first principles, even if you get lucky, you risk losing everything, often due to a swollen ego and loosening risk controls. As they say: “Money earned by luck is lost by effort.”
II. Why Is Long‑Termism Easier Said Than Done?
We believe that the universe and everything within it follows universal laws—natural laws. Wealth accumulation is a form of natural law. The principles behind wealth must align with economic, social, historical—and most fundamentally, natural—laws.
How people confront human nature’s weaknesses on the wealth path leads to a key solution: and that solution, surprising as it may be because it has become a cultural buzzword, is long‑termism.
At the outset of The Psychology of Money, Housel tells a striking story. In 2014, a 92‑year‑old janitor in Vermont died, and in his old shoebox were $8 million in blue‑chip stock certificates. Around the same time, a $14 million mansion in Connecticut was being auctioned by the bank—its owner was a bankrupt former finance executive and Harvard grad, once featured on the “40 Under 40” list. These two true stories are coinsides of the wealth world’s final mystery: why do people who understand finance formulas go broke, while ordinary people without investment knowledge build vast wealth?
The janitor—Reed—had only a high school education and worked as an auto mechanic, cleaner, and guard. His secret? He saved his scant earnings and bought blue‑chip stocks, letting compound interest grow over decades—which became $8 million. Meanwhile, Fosken, a Harvard grad who’d been honored among top young business leaders, went bankrupt during the 2008 financial crisis due to massive debt—he lost status, a luxurious lifestyle, and wealth.
The verdict: Reed was patient; Fosken was greedy. Reed practiced long‑termism; Fosken opportunism. Reed was frugal and helpful; Fosken chased hedonism and showboating. The result is clear.
Although extreme, this contrast is common. Among America’s Forbes 400, about 20% fall off the list every decade. Among U.S. public companies, roughly 40% lose all value over time. McKinsey’s ex‑CEO, Gray, with $100 million in assets, entered insider‑trading schemes to join the billionaire club, eventually imprisoned. IKEA’s frugal founder, Kamprad, drove a 1993 Volvo 240 and promised products were “good enough,” building a three‑generation empire.
As long‑termism became a buzzword, most people adopt it superficially. Like phones locked in low‑power or flight mode—functionality far below potential.
Zhang Lei of Hillhouse Capital said in Value: “Long‑termism is not only methodology but a value. Water doesn’t compete for first flow; it keeps flowing.” Another iconic long‑termist, Luo Zhenyu, championed patience in his year‑end speech: “Only long‑termists become friends of time.” Warren Buffett puts it even more simply: investment success is… just don’t leave the table.
III. Why Do Some Befriend Time While Most Miss Out?
The Psychology of Money dedicates a chapter to this: the showdown between getting rich and staying rich. The key message: successful investing doesn’t require constant success—you just need to not screw up. Thus, “don’t leave the table” has two meanings: don’t voluntarily walk away, and don’t get forced out by losing all your chips.
Wealth‑building and wealth‑preservation appear opposed, but are in fact dialectically unified by a survival mindset. The book recounts that in the 1929 crash, Livermore shorted stocks and earned $100 million—but went bankrupt via leveraged bets and committed suicide four years later. Graham, however, kept 30% cash reserves, survived, and founded value investing. Getting rich often involves risk; retaining wealth depends on security.
To preserve wealth, Housel offers two practical suggestions:
1. Planning is vital—but the most important part of any plan is preparing for the unforeseen.
2. Though optimistic about the future, maintain balanced expectations about obstacles blocking your path.
The first means being ready for adversity before you can truly be hopeful; the second is balancing optimism with realism. Economy, markets, and careers often grow through periods of continuous losses.
Fundamentally, Housel begins with long‑termism, then reflects on human nature and natural laws, offering actionable principles that leverage strengths and avoid pitfalls. One powerful insight comes from Rockefeller: “Wealth is compensation for a person’s ability to think—not reward for hard work.” That's what sets this book apart.
Through stories and historical cases, The Psychology of Money reveals that investing success depends 80% on psychology and behavior, and only 20% on technical skill. Most people fall prey to greed, fear, envy, and short-sightedness because they cling to comfort zones and cannot embrace pain. Even those who gain discipline slip back into weakness at the first temptation.
Behavioral economists have shown that when an account has 10% unrealized loss, 92% of investors panic‑sell—like hikers abandoning early in an avalanche. People weigh loss aversion far more heavily than gain chasing. Peter Lynch, once said: “Top investors have only about a 60% win rate.” That means even the best endure 40% failure—but ordinary investors treat losses as dead ends, whereas masters see them as mere steps.
The book outlines human biases and poor behaviors, offering a more elemental first principle beyond “befriend time”—it’s “befriend pain.” Housel calls this the contrast between soft skills and hard skills. Obtaining wealth is fundamentally a psychological and cognitive development process. The ultimate investment truth is counterintuitive: the best investors have learned to coexist with vulnerability and pain.
Musk once said: “Entrepreneurship is chewing glass while staring into the abyss.” Creating and accumulating wealth involves unavoidable pain. In the modern algorithm‑dominated finance world, the true moat isn’t technical analysis—it’s understanding and mastering the pain born of human weakness. Remember this startling mathematical fact: lottery sales in the U.S. outstrip movies + sports + games—and the main buyers are the poor. That reminds us: overcoming poverty requires abandoning instant gratification and embracing pain—that is wealth’s number‑one first principle.
Pain is compound interest’s friend, the price of time freedom, and the guarantee of financial security. Like mountaineers adapting to altitude, and surfers mastering rip currents: in wealth accumulation, we realize pain isn’t an enemy, but part of the process.
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IV. Rethink Compound Interest
The discipline most relevant to wealth is finance—with its focus on intertemporal and cross‑spatial trades, risk management, and decision‑making. The core long‑term strategy is to rely on time’s compound effect to gradually build wealth. Buffett is the quintessential example: of his $84.5 billion, $81.5 billion was earned after age 65—not due to high returns, but because he had invested continuously for 75 years.
Housel devotes an entire chapter to the “mystery of compound interest,” examining its fundamental and universal natural laws, using two examples—from nature and technology—that are even more shocking than wealth itself.
The first comes from glaciology. Scientists couldn’t explain Earth’s five distinct ice ages until Serbia’s Milanković discovered that tiny variations in Earth’s orbit reduced summer temperatures by 1–2°C—insufficient to melt high-elevation snow, which then reflected sunlight year after year. This feedback loop reached a tipping point: once glaciers thickened beyond 50 meters, the climate system flipped. Surprisingly, glaciers are triggered not by harsh winters but cool summers, whose leftover snow sets off chain reactions—year after year until continental ice sheets form.
The second example is hard‑drive capacity. IBM’s first disk in the 1950s held only 3.5 MB. By the 1960s, tens of MB; by the 1970s, IBM’s “Winchester” drives hit 70 MB—astronomical at the time. But then, capacity skyrocketed: iMac in 1999 held 6 GB; Power Mac in 2003 held 120 GB; iMac in 2006 reached 250 GB; by 2019, capacities hit 100 TB. The compound growth is astounding—but because compound interest defies human intuition, we tend to underestimate it.
It took 40 years (1950–1990) for disk capacity to grow by 296 MB—but from 1990 to now, it grew by 100 billion MB. Buffett likened compounding to a “snowball.” Charlie Munger said, “Compounding is one of the world’s most important mental models.” Himalayan Capital founder Li Lu even took it further: compounding is a phenomenon unique to modern civilization—5,000× returns as of 75× nominal annualized (after inflation) returns. Modern civilization is essentially rational, and compound thinking is rationality in action.
Musk mirrored this: in 2004, Gates criticized Gmail’s 1 GB capacity—he couldn’t imagine needing so much. The message is clear: compound interest is scientifically validated, but only if pursued over time—short‑term gains that lack replicability are inferior options.
But how does this tie to pain? Because compounding requires consistent, long-term effort counter to human nature and intuition. Rejecting short-term, one-off high-return bets is painful—but necessary. Housel offers clarity: “Good investments don’t have to yield the highest return—because one-time high returns are hard to repeat. Good investments are those that yield decent returns repeatedly over long durations—that’s when compound interest works its magic.”
Today we use the word “algorithm”—long‑termism emphasizes algorithmic longevity to maximize compound returns. Compared to flashy high‑return opportunities, long‑term repeatable investments are boring and torturous, especially when contrasted with stories of overnight wealth. Thus, to harness compounding and embrace long‑termism, you must resist arbitrage and speculation temptations—and avoid herd behavior and addictive actions that satisfy short-term cravings. In short, you must make choices most people won’t—and that hurts.
Thus, two key threads of The Psychology of Money are emerging: compounding and the attitude toward pain—the latter is a deeper instinct. The willingness to endure pain is a prerequisite for obtaining compounding’s power.
V. Embrace Pain to Embrace Wealth
Housel opens this section with a real story. In the late 19th century, Dr. Wagner‑Jauregg discovered that low‑grade fevers improved syphilis symptoms. He began infecting patients with malaria to induce fevers to treat syphilis. Though dangerous, it worked, earning him the 1927 Nobel Prize. In 2015, Yale immunologists led by Fahkryman experimentally confirmed that every 1 °C rise in body temperature slows viral replication by 200 times.
It’s a familiar yet painful scenario—fever is common yet dreaded. Parents, when told by nurses “fevers activate immune systems,” might view them as unsympathetic. Most immediately reach for antipyretics or IV drips—avoiding the pain. But fever isn’t inherently bad; it’s protective—it’s evolved to help.
Similarly, market fluctuations—the short‑term pain of investing—are essential to long‑term gains. Neuroscience finds that if investors experience five or more market crashes while maintaining discipline, their amygdala’s sensitivity to loss drops by 37%. Remaining calm through volatility is like a vaccine: small stresses build immunity.
Economist Harry Markowitz won the 1990 Nobel for portfolio theory—not max returns, but risk diversification to avoid painful losses, thereby enabling long‑termism. Portfolio theory might spread resources thin, but because it aligns with human nature, it’s viable. It’s like taking painkillers instead of fever reducers: you slow accumulation, but stay in the game.
Thus, long‑termism is the gradual strengthening of your wealth‑immune system—pain makes it progressively stronger. But most people still can’t endure this pain. What to do?
Do what you love. Housel argues: loving what you do helps you persist, increasing your likelihood of long‑term success more than any investment strategy.
As the book says: “If you don’t have an emotional attachment to your investment strategy or holdings, you’re more likely to abandon them when things get tough.” Scholars say absolute rationality leads to impatience and abandonment, whereas emotional resonance fosters endurance.
Hence the chapter: Reasonableness is better than pure rationality. In essence: emotionally resonant strategies are more sustainable—even if they sacrifice theoretical efficiency—for they facilitate tolerance of pain.
VI. Use Margin for Error as Insurance
We’ve established that embracing pain doesn’t guarantee wealth—only the right pain does. The phrase “do the hard yet correct thing” is popular—but correctness must be verified and is fallible. Once outcomes reverse, stop‑loss and adjustment are vital. Munger studied human error psychology—related to behavioral finance. The question: how to avoid mistakes breaking the compounding process?
You need strong error‑margin mechanisms. Housel discusses:
1. Margin of safety. Leave space to err—so mistakes don’t force you out of the game. Graham’s original concept: safety–margin aims to render predictions unnecessary. At Berkshire’s 2008 shareholder meeting, Buffett said: “I promise you and myself—we’ll keep plenty of cash.” Housel stresses the neglected principle: wealth accumulation correlates more with savings rate than income or returns. Reducing consumption, resisting comparison, and financing your life increases flexibility—even enabling the freedom to find work you love. Personal flexibility and slack act as error‑margins.
A helpful strategy: Dumbbell‑structure or split‑strategy planning. Taleb explains this in Black Swan, Antifragile, etc. Practically: like Buffett, keep ample cash; invest a portion aggressively but hold the rest in conservative assets—e.g., Li Ka‑Shing bought ports, utilities while allocating small sums to Zoom.
2. Avoid single‑point failures. Just as data centers replicate systems, business must avoid over‐reliance on one executive. Buffer mechanisms ensure errors don’t remove you from the arena. Such resilience allows compounding to create miracles over time.
3. Lower expectations. Raise fewer extreme financial targets; seek balance in life and work; reduce future regrets. Accept change and be willing to abandon outdated plans—only then can compounding continue.
With these measures, any pain from mistakes remains within your capacity—and over time, can strengthen you into an “antifragile” person.
VII. Expect Tail Events Amidst Trial and Error
With strong margins and buffers, learning about the nature of trial and error and their relationship with wealth helps mitigate anxiety or hesitation around pain. Many invest by futilely “overturning stones”—exhausting time and energy. But compounding wealth comes from tail events: a few rare—but powerful—wins.
Housel discusses “tail events” (also known as “long‑tail events”), where a small number of occurrences produce the majority of returns. A story: In 2000, Germany’s government bought Heinz Berggruen’s art collection for €100 million. Though the collection was worth over €1 billion, only 1% of the pieces—Picasso, Matisse—created the real value. Berggruen offset the other 99% with that 1% masterpiece. Similarly, from 1900–now, U.S. market’s 73× return came from just 7% of companies. This trend continues: Apple, Microsoft, Nvidia, the “Seven Sisters,” now account for ~30% of U.S. market cap. Renaissance Technologies’ Simonides yielded 66% annual returns—but did 30 million trades daily, with 51% losing. He mastered probability: limiting loss size ensures gains cover losses. It’s counterintuitive: failure dominates during trials—but a few hits change everything.
Soros metaphor: “Markets are like cold water. Novices panic at first wave, but veterans know fish follow chill.” He calmly held a $20 billion short on the pound in 1992, profiting $1 billion.
In venture capital (2004–14), among 21,000+ startup financings: 65% lost, 2.5% returned 10–20×, 1% returned 20×+, and 0.5% (~100 firms) returned 50×+. Those few accounted for the industry's profits.
So, befriending pain at its highest level means: show up, but don’t invest your identity—stay engaged without becoming attached.
Conclusion
For ordinary people, remember: the most equitable thing globally is time. Everyone has the same time—it’s the greatest dividend money can buy. But without the ability to embrace pain, one might not even hold enough discipline to benefit from compounding. What does wealth truly mean? As the book says: “Time freedom is wealth’s greatest dividend.” The Psychology of Money taught me this: treat money as a route to freedom. In the process of pursuing financial freedom, embrace pain—learn to dance with it. Once you have wealth, control your time; don’t become enslaved by comparison or extravagance. Let time bring more happiness and flexibility—granting spiritual freedom. In that way, pain and happiness become two sides of the same coin.
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