Understand & Apply the Psychology of Money to Gain Greater Happiness | Morgan Housel

Andrew Huberman opens by placing the episode within the podcast's stated remit of discussing science and science-based tools for everyday life, and introduces Morgan Housel as a partner at the Collaborative Fund, an expert in private wealth generation and management, and the author of the spectacularly bestselling book "The Psychology of Money". He frames the conversation around the psychology of money, how money can change your psychology, and how most people tend to lie at the extremes of either saving too much money or spending too much money. He also says most people get it completely wrong when it comes to framing in our minds what money is, what its real value is in its ability to generate happiness within us. Huberman states at the outset that neither he nor Housel will claim that beyond a certain dollar amount you don't increase your happiness, acknowledging that "money cannot buy happiness, but it can buffer stress". He adds that what we're really seeking when we talk about seeking wealth or money is freedom, that freedom is really about independence, and that if we are constantly in pursuit of wealth then we are not truly free or independent. He says the discussion is as much about being happy, being free, feeling independent, feeling free of stress as it is about this thing that we call money. Huberman later asks how to think about money, what it is, and how to frame it within our personal historical context, noting that we all and each think about money a little bit differently, and sets the goal that people will get a better understanding of what money is, why they work for it, and how to make it a true asset to their lives as opposed to something that is forever out of reach in terms of amount or what they expect it to bring them. He also confirms that Housel has a new book coming out next year about the art of spending money.

Huberman then picks up the book's opening idea, noting that it starts off with the notion that people are not crazy, which is in fact the title of the chapter, and asks directly whether that means people are rational about money. He links money and safety as very closely linked for most people, including himself: whether we have enough resources to take care of ourselves, plus a bit extra, one hopes, and he explicitly includes in taking care of oneself the buffering of one's anxiety about not having enough money. He broadens this to taking care of others that we might be responsible for or simply want to take care of, and connects it to decisions about how much and what type of education to get, describing the mental gymnastics of whether it is worth it to get an advanced degree, what major to focus on, and whether there are any jobs there. He recounts that a friend of the family said "Why would you go into neuroscience? There are no jobs in that." He answers that there were plenty of jobs in neuroscience, and still are, but says "I wouldn't say that most of them are high-paying jobs", and concludes that higher education doesn't always scale with higher income. He frames the underlying tension as integrating what we want to do because it's interesting versus what will make us money, asks whether there is some sort of mental path or some sort of checklist, concedes that "It becomes a pretty vast space", and states his own belief that you get the best workout of yourself, in terms of going after things that you're really interested in, while acknowledging that there may not be money in things that are highly interesting to somebody.

Morgan Housel's answer to the rationality question is "Oh, I think it's very different." He explains that what he meant by "no one is crazy" is that it is so easy for people to look around at society at how other people are spending their money, and saving their money, and investing their money, and say "Why the hell would anybody do that? Why would you waste your money on this? Why would you hoard your money like that?" Yet if you peel back the onion layer of what's going on in those people's lives, no one is really that crazy with how they spend their money or save their money, because "It makes sense to them in that moment." He offers a concrete illustration from his brother-in-law, a social worker who works with very disadvantaged kids, kids who are abused at home, who don't have homes, many of whom do very poorly at school, misbehave, get in fights, and don't go to school. He describes how common it is for the teacher to look at those kids and say "Why are you acting like this? Why don't you do the right thing? It's so obvious.", and relays the phrase in social work that "all behavior makes sense with enough information" — that if you look at what those kids are dealing with in life, it would all make sense to you why they are misbehaving at school. He calls this "a powerful idea for a lot of things in life" and applies it to money: how he spends his money today and saves his money today can be tied to the experience that he's had in life, how he was raised, where he was raised, how old he is, the generation he was born into — "all things that are outside of my control".

Housel extends the argument to visible consumption: he says "it is very common to look at people who are spending a ton of money" and that "there's a story behind that", that they're spending a ton of money because for a lot of them "they want some sort of attention" and "They're trying to get people's attention", and that maybe sometimes they're trying to cover up a hole. His answer is truncated at this point in the batch, but the claim being developed is that spending which looks irrational from the outside is treated as intelligible once the observer has enough information about the person's life.

Asked whether there is a mental path to cut through these considerations, Housel reports having asked Daniel Kahneman a very similar question about 10 years ago. He describes Kahneman as a world-renowned psychologist who won the Nobel Prize in economics and "passed away a year or two ago", and attributes to him the claim that "the trait that you need to do well with money over time, no matter who you are, is a well-calibrated sense of your future regret" — what you are going to end up regretting in the past. Housel says that at the highest level "that's how you should base all of your financial decisions": will I regret spending this or not spending this, will I regret making or not making this investment. He immediately qualifies that "much easier said than done", that most people do not fully understand their own sense of regret, and that "it changes over the course of your life".

Housel's personal example is his own saving. He says "I'm a big saver, have been for my entire adult life", and asks, heaven forbid, if he were on his deathbed tomorrow, would he regret the vacations he didn't take, the cars he didn't buy. The answer right now is "absolutely not": "I would feel so good knowing that my wife and kids are going to be okay", and he would take so much pleasure in knowing that he did not spend that money and "I saved it for their protection". He then asks "Will I still feel that way if I'm 80 years old?" and allows that then maybe "I should've lived a little bit more. I should've given my money away while I could've seen it being given away." He says it changes throughout the course of your life, that thinking through the lens of what am I going to regret is "never about YOLO" or about saving today so you can have it for tomorrow, which he calls "that's too simple" to think about, and that "what I will regret might be very different from what you will regret". His account turns to a "Very interesting story from Jeff Bezos" that is cut off in this batch.

Huberman draws out the limitation in this framework: he says the sense of what one is likely to regret, "if we have access to it at all", is something "we're not very good at anticipating", as Kahneman pointed out, and that "Most people lack a well-calibrated sense of future regret", which is going to change over time, "so it's dynamic". He adds that we come up with "all these explanations post hoc" about past choices — "The startup failed, but I learned a valuable lesson that then really supported me in a future endeavor." — and "we rationalize our poor choices from the past" in ways that allow us to connect the dots, a nod to "the famous Steve Jobs speech". He states that all of this "really says that we are very poor at placing our current experience and our past experience into any kind of future projection of ourselves", and that "we don't really know or anticipate how we are likely to change as we get older".

Housel names the mechanism "the end of history illusion": "you are very aware of how much you've changed in the last 20 years" — maybe smarter, wiser, with beliefs about things in life that have evolved, true for most people — yet if you actually dig into it and ask "Who will you be in 20 years from now?", most people "think they'll roughly be the same person they are today". He describes the belief "I have grown so much in the past, but I'm done growing", because "it's hard to project how you're going to be different in the future", and explains the resistance: to say that 20 years from now "I'll have very different beliefs about politics, whatever it might be" is "effectively admitting is what I believe today is wrong, and you don't want to believe that". He frames it as "a self-justification of your own beliefs" that makes it easier to go about the day, with "maybe you have a little bit of doubt around the edges", which makes it "difficult to take a truly long-term view and make a decision today that is going to be something that you're not going to regret in the future".

His proposed remedy is deliberately modest. He says "As I've always framed this, I think the only antidote to this" is "avoiding the extreme ends of financial planning", "and a lot of people are on the extreme ends". On one end he places "the FIRE movement", "these people who save 90% of their income and they want to retire at 28", and on the other hand "the YOLO crypto traders" who are like "Doesn't matter, just throw it all down and let's see what happens." He says "Those extreme ends are what you are most likely to regret", though the sentence is truncated here. The figures — 90% of income and retirement at 28 — are his characterisation of the FIRE movement, not independent data.

Huberman probes whether people generally fall into either one or the other category, "as you described with Bezos, not wanting to regret not having done something", and recasts this "in sort of pseudo-neurobiological terms" as being drawn toward "the possible dopaminergic or other rewards of having succeeded", "presumably" the pain of having not had and given himself the opportunity to succeed. He contrasts "the other path would be just avoiding the pain of loss", citing "a lot of studies, I think Kahneman did some of them" — with the hedge intact — that "people work a lot harder to avoid the pain of loss" "than to gain something". He observes "across various wealth scales and different ages" that some people are "more motivated to try new things" because "They like the sense of reward" and "it really is painful for them to stay in the same place", whereas "Other people, they like the sure thing. They like reliability", and he explicitly says "I don't want to extrapolate this to all aspects of their life". He illustrates with dogs, contrasting breeds "known for rarely ever having bitten somebody" with "Cane Corsos" that "occasionally bite, and when they bite, it's serious", while allowing "I'm sure there's some really nice, loving Cane Corsos out there". He then asks "are we really talking about a propensity for risk versus safety? And do you think that people fall into more or less two camps on that?"

Housel agrees that "some people would go nuts if they took the safe path" and "need some sort of variability in their life", but adds a second limitation: "we don't know the paths that we didn't take". His personal example is that "20 years ago, I was enrolled in Pepperdine, but I didn't go", transferring "just at the last second"; at "the school that I transferred to, I met my wife, started my career there", so it is easy for him to say "I'm so glad I did not go there" because "my life would not be what it is today". Yet he concedes "maybe it would've been fine. Maybe it would've been better. You never know the paths that you didn't take, where they're going to end up." He returns to "Kahneman's point, a well-calibrated sense of your future regret", but notes "nobody knows the paths that they didn't take and where those would go", which "just makes it very difficult to have any idea of which path you should be on". He repeats his preference for "avoiding those two camps of the extreme ends", and estimates that "more than half of people are on some sort of extreme end of spending way more than they can or saving way more than they need to", describing "There's a fat tail distribution in how people manage their money". He situates this against "a society that is richer than it's ever been by far, not just at the top, but at the median level", with "The average family is richer than they've ever been", and raises the open question "Are we happier today than we were 40 years ago or 100 years ago? That there's not a ton of evidence for."