Morgan Housel: "Most people massively overestimate how happy money will make them."

Thank you so much for having me.

Yeah. So I think it's sometimes easier for me to explain what I don't do. I don't consider myself a journalist. I'm not a fund manager. I'm not a financial adviser. I'm none of those things. I've never attached those labels to myself. I've always just considered myself someone with a deep interest in investing and as an outside observer. And I think it's important to be an outside observer because, look, there are some downsides in the sense that I'm not in the trenches, so to speak. I'm not working with clients. I'm not a fund manager. So there are perspectives that those professions have that I don't. But I think it's important sometimes, as you were as a journalist, a reporter, to be an outsider because you are not influenced by a lot of the pressures that the insiders are. And so I've always just considered myself someone who sits like a bird in the tree, just observing what's going on below. And I just want to observe not necessarily what people are doing, but what is going through their heads when they're doing it. So I've never been interested in questions like, what is the stock market going to do next? Or what is the economy going to do next? That's never interested me. I've always been very interested in questions like, what is going through people's heads when they make decisions with their investments, when they make decisions with their money? That's always been really fascinating to me. And I kind of felt like there was a little bit of a hole in that, and trying to answer those questions when I started doing this almost 20 years ago.

See, I really don't make that distinction that much because I think regardless of what your job title is or your profession is or what letters you have after your name, so to speak, the common denominator between novice investors and professional investors is they're all human and their brains work very similarly. And so they're going to have the same propensity, by and large, for greed and fear and overconfidence and envy and social aspiration. And those are the things that matter more than anything in investing. And so, of course, you can be, and there are many highly educated MBA professional portfolio managers who lose control over their sense of greed and fear, and they will not do well as investors. There are also many complete novice, uneducated, inexperienced mom-and-pop individual investors who have a very good grasp on their sense of long-term thinking and greed and fear and accepting volatility, and they will do very well as investors. So, you know, it's important to point out that very few fields are like that. You know, it's not like it would be crazy in medicine if someone who was a certified medical doctor did worse at health and performing surgery than a layperson. That would be crazy. That would never happen. Or if a layperson who had no education could build a skyscraper that was stronger than the one built by a professional engineer. That would be crazy. But that example does happen in investing. It does happen with money, where it's not necessarily what you know that matters. It's about how you behave. And I think that was also a hole in finance, particularly academic finance over the last 50 or 100 years, where it was taught, by and large, with good intentions by good people, that if you only knew the right formulas and if you had the right data and you understood the concepts, you could do well. And if you didn't have those things, you wouldn't do well. I'm kind of whitewashing that, but that's kind of how it was taught. And I just thought there was so much evidence that it was not like that at all. It's not necessarily to discount the formulas or the data or the charts, but none of those things matter until you've mastered your behavior. And until you can figure that out, whether you are an MBA fund manager or a soccer mom who doesn't know anything about investing, nothing else is going to matter.

Not only investing, not only investment decisions, but how we save our money, how we spend our money, our social aspiration, those kind of things. And it's a very rare field that's like that. Again, there's not many other things that we deal with in life where it is purely a behavioral aspect. I guess one close analogy is our own personal health, where you can be a PhD in biology and understand all of the mechanics and the organic chemistry of how our bodies work. But if you are an alcoholic and you smoke and you sleep two hours a night, then none of the knowledge is going to make any difference if you haven't mastered your own behavior to begin with. And I think that's how it is close to all areas of money. I think it's the most important aspect of everything that happens with money, is that behavior is always going to trump intelligence.

I think one that is very easy to overlook, and it's almost counterintuitive, is the idea that there is not one right way to invest your money. And I think that is... I think the investing industry has inadvertently, again, by good, honest, noble people, done a lot of damage with the general idea that there is a right way to invest, and if you are not doing it, then you're doing it wrong. And the general idea that if I am investing differently than you are, then one of us is making a mistake. And I think that's by and large not true. That investing is very much an individualistic endeavor, and myself in the country that I live in, and yourself in the country that you live in, and people from different generations and different upbringings and different cultures are going to have very different views on what is an acceptable level of risk to take on, how you should invest, on what your aspirations are. And so I've been very open about how I invest my own money. I dollar-cost average into index funds that I hope to own for 50 years. But whenever I say that, I have to go so far out of my way to say I don't necessarily recommend that you do that. It might be good for you. It might be a disaster. It might be the right advice for other people. It might be the worst advice you could possibly give them. And I think I spent a lot of my career not believing that, not understanding that quite yet. I was closer to the idea that there is a right way to invest, and if you're doing it differently, you're doing it wrong. And I think there is so much more nuance to that. And I think a lot of financial poor decisions, a lot of financial mistakes happen when somebody is following an investing plan or a spending plan that is right for somebody else but wrong for you. And it's a very easy trap to go down because you can look at other people, or your financial adviser will tell you this is the right way to do it. Look at all these people who have exceeded and excelled doing this strategy, but it's not right for your personality. And so there are things that I do in my household that my wife and I do with our money that don't necessarily make sense on a spreadsheet. I can't explain them and say, 'Look, given this academic theory and given these numbers that add up in Excel in my spreadsheet, that's why I do it.' They don't make a lot of analytical sense, but they fit my personality, and they might not fit yours. That's the whole point. The whole point is that we're all very different in this endeavor. And I think so that's one of the... the question you asked was one of the most prominent behavioral biases, and I think it is that it is the assumption that there is one right way to do it when this is actually an art. This is actually a very individualistic endeavor.

Something that I think would be overrated would be the idea that, you know, it's always the case that the biggest economic story and the biggest news story of the next year or the next five years is something that nobody is talking about today. It's always been the case that what actually moves the needle the most in hindsight is the surprise, which was COVID-19 that nobody saw coming. It was 9/11, the terrorist attack. It was Pearl Harbor that dragged the United States into World War II. Those kind of events, their common denominator is not that they were big. It's that they were unforeseen by virtually everyone. They were unforeseeable. And so I think the idea that gets too much attention in finance is that if we crunch enough data and talk to enough smart people and get enough visionaries giving us their outlook, we can have a 12-month outlook, a 12-month forecast that's going to give us any reasonable idea of what the actual biggest risks are in our future.

Yeah, I think that's true, but it's even more nuanced than that. There's a great story from Daniel Kahneman, the late psychologist who won the Nobel Prize in economics, and he told the story about 10 years ago. He said he went to a financial adviser, and at the time, I'm guessing he was like late 70s, around that age, and he said, 'I have no desire to ever make more money than I have right now. I have no desire to ever see my net worth higher than it is right now. I just want to live out my days on this little pot of money that I've saved, and that's all I want to do.' And he said the financial adviser told him, 'I cannot work with you,' because to her, to the financial adviser, it was insane that somebody would not want more money. She couldn't understand it. And Kahneman told the story, he was very curious about that idea that people would not want more money. And so to a lot of people, the goal of investing is to absolutely maximize returns. That's the entire reason they wake up in the morning is to earn the highest return that they can. To other people on the other end of the spectrum, there's people like Kahneman who are like, 'I literally don't want another penny to my name. And like, don't risk a single penny of this.' I listened to this podcast last week with Jay Leno, who's a famous talk show host in the United States. And he said the same thing. He said for his entire adult life, he's gone to his financial adviser and he's like, 'Look, the purpose of this money is to make sure that I don't have less next year. If I ever come to you, Mr. Financial Adviser, and there's less money than I had the year before, you have failed.' So he's basically saying, 'Don't take any risk whatsoever. I'm fine if I just earn a 2% return. I never want to see this go down.' So he was virtually the same. And so the idea that, you know, there is a target rate of return in the market, and of course if we're talking to academic finance people, they would say, look, that's consistent with what they believe too. There's a risk spectrum of how much risk and return you want to take. But I think people get into a lot of damage and into a lot of trouble in finance when they assume that, oh, given my age and given my income, I should be targeting X% per year, when actually the range of the spectrum of what people are willing to put up with in terms of volatility and risk, and what they actually aspire to in terms of the returns and the wealth they're trying to build, there's a vast difference in those things.

I don't think anyone will follow in his footsteps, so to speak. I think he was the most influential psychologist since probably Sigmund Freud. And so, but I think the idea, and he was, I don't think he sought this out, but he is, as you mentioned, a psychologist, but became the most influential economist of his era. I don't think that's an exaggeration. And but I think...

Yes. Here's, and I don't want to put words in his mouth. I mean, he's passed away now, but I think the idea that finance is an unbelievably clear window into people's psychology, because how you think about money and aspiration and risk is a very clear insight into your soul, into who you are. And other things in your life that are also a good insight into who you are, like your personal relationships with your spouse and things like that, most people are kind of walled off. Like, that's my personal life. I'm not going to talk about it. I'm not going to show anybody. But with money, there is almost like a peacocking effect of you want people to see your house, your car, your clothes. You want them to know how successful you are, or you are ashamed of how unsuccessful you are. And so it is a very clear window into how people think about their own psychology and the psychology of others. And I think inadvertently, people like Kahneman were attracted to that, even if their entire aspiration was just understanding psychology.

I think most people have experienced this and will recognize it when I say it, that it is easy to tell yourself, oh, once I have X dollars, once my income, my salary and my net worth is X, whatever X might be, then I'll be happy. Then I'll be satisfied. And then if you are fortunate enough to get there, then it becomes, well, maybe if I had 2X, then I'd be happy. And then you get there. Maybe it's, that's always the gaze of your aspiration is never satiated. You're always just moving on to the next mountain, the next level. And so the idea that like you can, if you are young, you tell yourself, man, if I had a million dollars, that's all I'd ever need. I'd be happy forever. And some people can do that. What's way more common is if you get to a million dollars, you're like, ah, actually, I think five million is the amount that I would need. And there have been several academic studies that have shown this, that basically if you ask people how much money would you need to be happy, no matter how much money you make or what your net worth is today, the answer that most people will give you is about two times what I have today. And that is true whether you make fifty thousand dollars per year or ten million dollars per year. The amount that you think will satiate you is double whatever you're earning right now. And so that's the idea of if your expectations are always growing as fast or even faster than your income, you will never be satisfied with what you have. And I think when people daydream about having more money, having a bigger house, being in retirement, those kind of things, when they daydream about that, and those daydreams feel good, by and large, what you are anticipating when you have those daydreams is having that house, car, retirement, and being satisfied with it, like waking up and saying, this is all I need. I don't need anything else. I don't aspire for anything else. And that's what feels good. Satisfaction and contentment is what feels great. But what is way more common in a competitive world are people who get to that level and say, I want more. I need more. It's always important for me to point out that I want to live in that world because that is the root of all progress. It is a root of all progress and innovation that most people wake up every morning, regardless of how much material success they have, and they say, this is not enough. We need more. We need more efficient products. We need better innovation. We need better medical technology. That's the root of all progress. And so this is not a bad thing at all. But at the individual level, you can see why it is possible to double your income, triple your income, ten-x your income, and not feel any better for it. If your expectations are rising in lockstep with your income, you will never be satisfied with what you have. And then you realize that, yes, I want a higher income. I want a higher net worth, but I have to go out of my way to manage my expectations with as much emphasis as I do improving my circumstances.

I think that's, I think you've absolutely hit the nail on the head that what people like is growth, not necessarily getting to a spot. Will Smith, the great, great actor, phrased this in a very smart way, I thought, with fame. He said, becoming famous is the best feeling in the world. Being famous is okay at best, and losing fame is the worst feeling that you can imagine. And so inherent in that is like what feels good is the change. What feels good is the growth. But actually getting to a level doesn't really do that much for you because you're just thinking about the next change, the next level up. And so that's why it's very common, and it's not even a bad thing for us to have financial goals. Oh, it would be great if my income could grow by this much. It would be great if my net worth was this much. Those are great, but we massively overestimate what it's going to do for our well-being.