The Psychology of Money

Housel laments that many people are biased against optimistic perspectives because they can sound like a “sales pitch,” while pessimistic forecasts seem more “intellectually captivating” and “smarter” (158). Optimism is not an unquestioning belief that good things are guaranteed to happen, but an understanding that it is likely that things will improve over time. Optimism is also an openness to trying to improve one’s situation.

Housel offers an example of extremely pessimistic forecasting published by the Wall Street Journal, in which the author predicted the breakdown of the American government in response to the 2008 financial crisis. Housel ponders why such pessimistic views are seen as distinctly possible, while wildly optimistic views are automatically dismissed. He points to Japan’s incredible recovery post WWll as an example of a success story that no one predicted in the 1940s, and which would have seemed impossible to the average Japanese person.

Our tendency to pay more attention to bad news means that our culture is producing more “prophets of doom” than nuanced or moderate commentators (160). Housel examines how our natural tendency toward pessimism applies to our finances. He argues that because money is universal, financial disasters are inherently compelling to everyone, since anyone may be affected by a recession or depression. Money and health are matters that apply to everyone, but health is more individual whereas “money issues are systemic” (163).

Housel points to the invention of the airplane as an example of how pessimistic predictions based on a lack of understanding can be disproved over time. As evidence of such misguided pessimism, he cites numerous historical newspaper articles that argued that passenger and freighter planes would be impossible to invent.

Another reason why pessimistic perspectives are so compelling is that they tend to focus on recent dramatic disasters, such as conflicts or accidents, whereas optimistic arguments often emphasize improvements that happen over many years and are therefore less noticeable. For example, Hurricane Katrina received a lot of news coverage, but a positive trend such as the 70% reduction in deaths from heart disease is much less well known. Housel concludes by connecting his argument about pessimism with his previous advice to accept that negative experiences are an inherent part of investing and can occur along with “the long backdrop of growth” (168).

Housel examines the role that stories play in shaping people’s perspectives about their finances and the state of the economy. Housel argues that “narrative damage” is “one of the most potent economic forces that exists” and is as harmful to the economy as “tangible economic damage” (171).

He points to the 2008 financial crisis as an example. Housel argues that people’s perception of this crisis created a kind of self-fulfilling prophecy: As people worried that house prices would rise, mortgage defaults increased, and the banks lost money, prompting them to stop lending so much. This lack of funds caused companies to lay off employees, further triggering a reduction in spending within the economy. Housel believes that the US had a greater capacity for wealth generation in 2009 than in 2007 due to improvements in technology, but people’s beliefs about the economy stalled recovery.

Housel examines the assumptions that drive our own financial narratives. He argues that everyone is biased toward beliefs that they want to be true, calling these “appealing fictions” (172). This bias motivates people to believe in “financial quackery” that promises them incredible profits (174). Housel emphasizes that our vulnerability to these biases makes having a margin for error even more important to everyone’s financial health. Additionally, everyone must be aware that their understanding of the world will always be incomplete and should remain conscious of how they are generating stories to try to fill in those information gaps.

Housel compares adults trying to understand the economy and their own chances in it to toddlers forming opinions about the world around them: both groups feel certain about their conclusions, not knowing that their information is incomplete. These “blind spots” make us feel as though we understand things that we do not. Furthermore, this incomplete understanding can prompt us to give too much credence to experts and commentators who make confident predictions about the future, even though the data suggests that these forecasts are often inaccurate. People are inherently prone to paying attention to these predictions since it comforts them to consider the world and economy as predictable and controllable. Housel reiterates that these biases affect everyone, from lay people to financial professionals.