Fear, Freedom, and Financial Decision-Making

Joe: Award-winning author, Morgan Housel is an expert on the psychology of financial decision-making, a partner at the Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. His book, The Psychology of Money has sold over one million copies and has been translated into 46 languages. He is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers. Winner of the New York Times Sidney Award and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism.

Welcome, Morgan. Delighted to have you here. Thanks for joining us on the podcast.

Morgan: Thanks so much for having me. Happy to be here.

Joe: So, Morgan, you’re a partner at the Collaborative Fund. Can you tell us a little about the focus of your work there?

Morgan: Well, let me talk to you a little bit about the Collaborative Fund, and then a little bit about my work because those are kind of two distinct things. The Collaborative Fund is a private investment vehicle, primarily venture capital but also some later-stage investments and we also have a public markets hedge fund and a crypto fund, a wide variety of asset classes all investing in companies that use their ability to do some good in the world as an economic competitive advantage, which is very different from just companies that are trying to do good. We want companies that are trying to do good without sacrificing any sort of consumer quality or consumer user experience. That’s Collaborative Fund.

My job at Collaborative Fund is … I’ve always been a writer. That’s what I’ve done my entire career. It’s what I always will do. So what I do at the Fund is writing on the blog, [writing] research papers, speaking. The idea of what I do at Collaborative Fund is very broadly, particularly in private markets, money is fungible, so if you want to win deals as a private investor, if you’re a venture capitalist or private equity fund, if you want to win deals, people need to know who you are and what makes you different. Because a lot of people can write a check. There’s a lot of money in the world. If your only value-add as a venture capitalist is, “I can write you a big check tomorrow” that’s not going to work very well. So people only know what the firm’s values are and what the firm is if people are aware of what you’re doing.

So the purpose of the writing that I do is to wave my arms and make people more aware of what the firm is doing. I actually don’t write about what investments we’re making or what we’re doing at the team. I just want to write things about finance and economics and behaviors that hopefully people will find interesting and share with their friends and forward to their colleagues just to kind of raise the awareness of the firm.

Joe: So just backing up for a second you mentioned the term “venture capitalist.” What are you talking about there? What is a venture capitalist versus a typical investor or a financier?

Morgan: You know, there’s really not too much difference other than the age of the companies we are investing in. So a venture capitalist is going to be investing in startups, some of which don’t even have a product developed yet. Sometimes it’s two founders and a PowerPoint presentation and that’s the entire company. Sometimes it’s that early. So, you know, it’s really not that dissimilar than if you are investing in an auto repair shop or an apartment building. It’s just the age at which you are going in and writing the check to the investor that’s different. The other distinction I would make is, if you buy Apple stock in your Fidelity account or in your Robinhood account, 99.9% of the time what you are doing is you are buying stock from another investor. Whereas, in venture capital, you are giving the money straight to the company so  that company can use the money to build a factory, hire employees. Whereas, if you buy Apple stock today, Apple the company is not actually getting more money. You’re just trading stock with another investor.

Joe: Oh, that’s very helpful. Thanks. And so, when you’re writing, are you writing to the potential business owners that you might be investing in from the Collaborative Fund? Are you writing to people who might be looking to put their money with the Collaborative Fund to do investing on their behalf?

Morgan: The truth is, when I’m writing, neither of those things are on my mind.

Joe: Okay.

Morgan: And I think things would start to break down if I was innocently pandering to either of those groups. And I would say a lot of firms do that. They try to pander to their constituents so to speak. And I just think that doesn’t work. I think it’s really obvious when you are pandering and … here’s the thing. Nobody wakes up in the morning and they say, “I want to go read some marketing content.” No one wants to do that. So if those things that you are writing are obviously marketing your own firm, your own product, there’s a very limited audience for that. Your mom wants to read that. Some of your employees and closest investors want to read that. Not a lot of other people want to read it.

So I just want to write things that I find interesting, that I think are interesting in the world, and then I take a leap of faith that other people will find these interesting as well. And, you know, look. At the end of the day, if there are entrepreneurs out there, potential investors out there, that might be interested in Collaborative Fund that they happen to read it as well, that’s great. That’s wonderful. But I really just want to cast the widest net that I can and write things that I think are interesting. And if the top of that funnel so to speak is wide enough, it’s eventually going to capture people that are really integral to the business as well.

Joe: I suppose one of the things you have found interesting — certainly it’s how you came to our attention — is decision-making as related to personal finance. And you wrote an entire book called The Psychology of Money. How did you first get interested in or think there was a way that you could improve your decision-making around financial decisions?

Morgan: It really started for me with … I started as a financial writer in 2008, which is when the world was completely falling to pieces during the financial crisis. I spent my early years as a writer just trying to answer the question “What happened? What happened during the financial crisis? What happened during the housing bubble that preceded it? Why did everything fall apart?” Simple question … just trying to figure it out. And as the years went on, I realized that you could not answer the question “what happened?” if you were just looking through the lens of finance or economics. There’s nothing in an economics textbook that will explain to you why people behaved the way that they did during the housing bubble, and why the decisions that were actually made happened during the bust. It just didn’t make sense.

But you could explain and rationalize a lot of what happened if you were looking through the lens of psychology and sociology and politics and history. All these other fields that had nothing to do with finance, those really explain the financial crisis really well. As a writer trying to figure all of this out, that just opened up this door to, “Okay. Finance is way more than finance” [laughs] and the decisions we make with our money are much more complicated and involved than finance, you know, through that narrow lens of financial economics. And so I wanted to explain money and explain investing and finance through the lens of all these other fields that tend to be ignored. But they all fall under this umbrella of human behavior and decisions and greed and fear and risk. That’s what matters when we’re making decisions with our money but those traits also apply to so many other areas of the world. And I think it’s so narrow and incomplete to study finance only through the lens of finance. And I just thought it was so much more interesting and more complete if you could study finance by reading a bunch of psychology and history and politics, all these other fields. So that’s how it sent me down that path.

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“‘What happened during the financial crisis? What happened during the housing bubble that preceded it? Why did everything fall apart?’ … There’s nothing in an economics textbook that will explain to you why people behaved the way that they did … the decisions we make with our money are much more complicated and involved than finance … they all fall under this umbrella of human behavior and decisions and greed and fear and risk. That’s what matters when we’re making decisions
with our money.”  — Morgan Housel

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Morgan: You brought up something that I think was interesting, which was, “How could we improve our behavior?”

Joe: Yeah.

Morgan: And the answer to that is by and large I think we can’t.

It’s kind of a cynical observation but I think it’s really true. The idea that we can read a book or look at a spreadsheet and change the impact of dopamine and cortisol and serotonin in our brain. Like it just doesn’t work that way. And that’s not necessarily being a fatalist and saying, “There’s nothing you can do about it.” But I do think that one of the best things that we can do is rather than trying to fix our flaws, is just become more aware and accepting of them.

And [laughs] realize where we’re likely to go astray, realize how imperfect we are, realize that we are not machines and spreadsheets that are just trying to be perfected. We are just completely flawed emotional people and if you accept those behaviors and realize the limits of your ability to think rationally. I think that’s actually a huge improvement, but that’s very different from fixing all of the flaws that we all come with.

Joe: Yeah I wondered about that as I was reading your book in thinking, “Well, you imply that, and yet at the same time you give guidance about ways that people can improve the likelihood of them not misbehaving, so to speak.” Like to not sell at the bottom and chase after returns by already having committed to a strategy ahead of time. You mentioned that most of your own personal investments in ETFs, that you’re thinking about trying to buy the market broadly and get good enough returns or reasonable returns, the ones that meet your goals and not worry about trying to win so to speak.

Morgan: Yeah.

Joe: Are there other strategies that you noticed, “Oh, if more people adopted this with their financial decision-making, they’d end up in a better place overall”?

Morgan:  I think the biggest one, and this gets back to, “we are who we are and it’s hard to fix that.” … I think one of the biggest flaws in finance is that we teach it and think about it like its math. And in math there is one right answer for everyone. It doesn’t matter who you are or where you’re from or how old you are or what your political beliefs are. Two plus two equals four for everybody. There’s one right answer all the time for everyone.And I think there’s so much evidence that with money and investing it’s not like that. You might come to a very different conclusion about what’s the best thing to do with your money than I will. And it’s not because we’re smarter than one another. It’s not because we disagree with each other. It’s just because we’re different people. We have different goals, different aspirations, different risk tolerances that differ from every person. And so we should not think that there’s one right answer. And we should just kind of become more introspective about who we are and what we want. And the different goals and aspirations we have in life. And follow that rather than looking for the “right answer.”

One of the things that can really bother me about the financial media sometimes is like if you’re watching CNBC and there’ll be a guy that comes on and he says, “You should sell Netflix.”

Joe: Right.

Morgan: And I always wanted to be like, “Who are you talking to? Are you talking to a 17-year-old day trader? Are you talking to a 91-year-old widow? Are you talking to an endowment?” because we shouldn’t pretend like the right thing for all those different people to do is going to be the same. It’s always different for them. So I think that individual-ness of money is very much overlooked.

And it’s also pretty liberating to know that you should just become introspective about who you are. And what you want and what your family’s goals are, and just do that. Even if your friends and the textbooks and the guy on CNBC disagree with it, if it’s the right thing for you, then it makes sense. I think … back to “investing is not math,” I think it’s much closer to a taste in music. Some people like classical music. Some people like rock. Some people like Megadeth. It’s different for everybody and no one’s right or wrong. It’s just what works for you. Okay, if that works for you, go do that.

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“I think one of the biggest flaws in finance is that we teach it and think about it like its math. And in math there is one right answer for everyone. It doesn’t matter who you are or where you’re from or how old you are or what your political beliefs are. Two plus two equals four for everybody. … And I think there’s so much evidence that with money and investing it’s not like that. You might come to a very different conclusion about what’s the best thing to do with your money than I will …  It’s just because we’re different people. We have different goals, different aspirations, different risk tolerances that differ from every person.”  — Morgan Housel

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Joe: What would make the situation of a day trader, for example, looking at a particular stock, different from the way a pensioner or even a pension fund would look at it? Can you talk a little about that difference?

Morgan: Yeah. If you’re a day trader, then all you care about is whether this stock that you buy is going to go up between now and the end of the day. And you couldn’t care less whether that company is overvalued or what that company’s products are or whether the company’s board of directors is ethical. None of that comes into play at all. Completely out of sight, out of mind. And if you are an endowment and you’re trying to own a stock, a business, for the next hundred years, then the only things that matters are: is this company’s products sustainable? Do they treat their customers right? Is it a profitable business? Do they have ethical management? That’s all that matters. So it’s just a completely different thing.

And I often feel like when we say the word “investing” or the word “investor,” we often think of it like it’s one game. Like we’re all playing the same game. And when you think about the difference between a day trader and a pension fund, you realize that we’re not. Some of us are playing chess. Some of us are playing football. Some of us are playing basketball. It’s completely different sports and the different sports have different rules.

They have different philosophies. They favor different body types in sports, they’re completely different things. I’ve made this point that if you are a 110-pound rail-skinny person, you might be the best marathon runner in the world. You’re a world-class athlete. And then if you are five-foot-four, stocky, 300 pounds of thick muscle, you might be a great power lifter. So you’re also a world-class athlete. They’re both world-class athletes even though they’re completely different. They eat different diets. They’d have different exercise regimens. And it’s the same in investing, between the day trader and the endowment. The skills that they need, the outlooks that they’re going to have, the daily routines could not be more different even if it works for them given what they’re doing.

Joe: So those are wonderful differences. One of the things I liked about in your book is when you highlighted some of our similarities. And unfortunately a lot of them are around the ways that we go wrong, the cognitive errors that we make. Can you mention a couple of those that you’ve, you’ve written about?

Morgan: I actually think the biggest is what we just described in terms of people looking for “the” answer-

Joe: Yes.

Morgan: … when there is not “the” answer. There is just what works for you. That’s probably the biggest one. One of the other big ones that really impacts how we think about money is that it’s so easy to ignore the role of luck in outcomes, in your own outcomes, in your role model’s outcomes. Part of the reason is because if I were to look you in the eye and say, “You just got lucky,” that makes me look like a jerk. It makes me look like I’m bitter and jealous. So people don’t tend to do that. And if I were to look in the mirror and say, “I just got lucky,” that’s hard to swallow too. I don’t want to admit that, so I tend to ignore that as well. So both when you are projecting onto other people and looking at yourself we tend to completely ignore the role of luck. And I think that’s a really unfortunate thing because there is so much that happens. And history is so fragile and hanging by a thread that it is so easy to ignore how events that worked out could have gone a completely different way.

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“One [cognitive error] that really impacts how we think about money is that it’s so easy to ignore the role of luck in outcomes, in your own outcomes, in your role model’s outcomes. Part of the reason is because if I were to look you in the eye and say, ‘You just got lucky,’ that makes me look like a jerk. It makes me look like I’m bitter and jealous. So people don’t tend to do that. And if I were to look in the mirror and say, ‘I just got lucky,’ that’s hard to swallow too … So both when you are projecting onto other people and looking at yourself we tend to completely ignore the role of luck.”  — Morgan Housel

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One example I used in the book, Cornelius Vanderbilt, who was one of the richest humans of all time. He was a businessman back in the 1800s. He was kind of a shipping entrepreneur. When he died he was worth almost half a trillion dollars, if you adjust his net-worth for inflation. One of the most successful people of all time. But if you go back and read his biography, it’s not an exaggeration, it’s completely accurate, to say he was successful because he broke the law. He would look at the shipping laws of New York state and of the United States in the 19th century. And the reason that he would get ahead over his competitors is because he was just not afraid of the courts whatsoever. He would just taunt the courts like, “Yeah. Come and get me. I’m going to break the rules and I’m going to charge whatever I want. And break all these customs and rules. And there’s nothing you can do about it.” And so the fact that it ended up okay for him, like it was so easy to imagine another world where Cornelius Vanderbilt went to jail, and rather than lionizing him as this great American industrialist entrepreneur, we just look back at him as just a common crook. John D. Rockefeller I think was very similar. Of course, he was one of the most successful businessmen of all time, not quite as much as Vanderbilt, but if you go back and look at how he was doing it, he was just coming right up to the edge of the law and staying a millimeter away from it, if not going over it, and that was why he was so successful.

And I think it’s easy to ignore that. And when I say that, people’s eyebrows might rise because those people, Vanderbilt and Rockefeller, all we know them for now is like, “Oh, so successful. So great. So smart.” And it could have gone different ways. I think the line between bold and reckless is very thin. And there are so many business people out there who’ve failed and we now realize that they were reckless. And there’s other people that we just say, “Oh, they were so bold.” And that’s, that’s always hard to realize in real time.

Joe: So I appreciate that and I understand that we all need to take some risk when we invest. That’s part of what we’re getting paid for when we make an investment is the assumption of that risk. But what are some ways that you have found, or that you’ve written about, that people can reduce the role of chance so that they’re likely to get a reasonable rate of return in their life?

Morgan: I think the biggest thing that tends to be ignored in money, in saving, for your personal finances is that if you look historically, the biggest risks to the economy, to your personal life, around the world, whatever it might be. The biggest risk is always what nobody sees coming.

Joe: Hmm.

Morgan: The risks that are in the newspaper that we talk about every day of like, “Oh, is, is the Fed going to raise interest rates? Are corporate profits going to fall? Are our mortgage rates going to rise?” That kind of thing. It’s not that those things aren’t risky, it’s that everyone knows about them. They’re not surprises. They’re in the newspaper all day. The things that are actually risky, that move the needle more than anything else, are things like COVID-19 and September 11th. And all these events that more or less nobody sees coming before they arrive and wreak havoc. In any given year, the biggest news story is something that on January 1st of that year no one was talking about. I think there are so few exceptions to that, it’s astounding. And because of that … This is where it comes in with your personal finances. If you are only saving money for the events that you can foresee and that you can imagine, 10 times out of 10, you’re going to miss the surprise by definition.

Joe: Yeah.

Morgan: And therefore, I think when you’re saving money, you should have a level of savings that feels like it’s too much because when it feels like too much, that’s when you know that you have enough for the risk that you can’t even imagine. That you can’t even envision. If you’re only saving for the events that you can foresee, you’re done. And that’s why I think a lot of people and businesses that get caught off guard or go bankrupt or are caught flat-footed, it’s not that they were reckless. A lot of them spent a ton of time planning for the future. But they only planned for the events that made sense and not the event that didn’t make sense that always does the most damage.

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“I think the biggest thing that tends to be ignored … in saving for your personal finances is that if you look historically, the biggest risks to the economy, to your personal life … are things like COVID-19 and September 11th. And all these events that more or less nobody sees coming before they arrive and wreak havoc.  And therefore, I think when you’re saving money, you should have a level of savings that feels like it’s too much because when it feels like too much, that’s when you know that you have enough for the risk that you can’t even imagine.” — Morgan Housel

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Joe: And is that because really weird things are happening all the time or is it just that our view is so constrained to the things that we’ve already got samples of that we just … Are we just wildly ignorant of the world basically and the things that could happen or are these really long tail events that are showing up?

Morgan: Yeah. There’s always this irony that history is really the study of surprises. Like if you’re thinking about history, the big events that we talk about in a high school history textbook are the big surprises that people didn’t see coming but had a big impact on the world. The irony though is that we use history as a guide to the future.

Joe: Yeah.

Morgan: So it’s the study of surprises used as a map and then no one sees the irony [laughs] in that. And I think that’s where a lot of this comes from. We have such a desperate need and desire to predict the future. And the only thing that we can really go off of is history. And I think this also becomes more of a problem in the last 10 or 20 years because now there’s so much data at all of our fingertips. To be like, “Well, what happened in the past? Let’s calculate down to the fifth decimal what’s going to happen next.”

There are some fields in which that might work, some areas of finance and trading where that can work. In weather forecasting it could really work. There are some things where you can. But I think the big social events, political events, economic events, that’s where it’s like I don’t know if the past really gives us much, much map of the future at all.

Joe: Right. Your World War II example I thought was spot-on with, “All right. Here come eight million troops back home. There’s not going to be any work for them. There aren’t any houses for them. We’re about to have another depression, Mr. President.”

Morgan: Oh, yeah.

Joe: Yeah.

Morgan: It was … here’s what’s crazy is that we today, we look back at the end of World War II as day one of the American economic miracle. But what’s crazy is that if you go back to 1945, when the war ended, when we didn’t know what was going to happen next, the universal view with almost no one pushing back was that now that wartime spending was over and you had all these GIs coming home with nothing to do, we were going to go right back into the Great Depression.

You know, World War II was what pulled America out of the Great Depression. And when the war was over people were so scarred from the Depression that going back to it really felt like that’s where we’re going to go. And there was even a lot of talk that now that the war was over, it’s going to be worse than the Depression because we had so much debt from the war. And virtually the opposite happened. And it makes perfect sense in hindsight but at the time it really didn’t make much sense at all.

I mean, the more recent example of this is you go back to March of 2020 with, when COVID was really wreaking havoc for the first time. Every smart person who I knew, the smartest economic minds and business minds were as pessimistic as you could possibly get. I mean, I had one friend who I really admire who brought up this point where he was like, “Look, there was only three trillion dollars of capital in the banking world and you don’t need to be that creative to see how all of that is wiped out, which would mean the entire U.S. banking system — not one bank, the whole system — may have collapsed. And in that scenario it’s hard to imagine anything else but just utter chaos in the streets.”

And that was what some of my smartest, most level-headed friends were saying at the time. And the irony is now, when you go back and look at that period, at least from the perspective of the stock market investments, we should have been wildly bullish and optimistic during that time. But at the moment it was the exact opposite. And I think it’s, it’s always like that. It always makes sense in hindsight but in the moment, uncertainty is really hard to wrap your head around.

And I think one of the problems with studying history is that we know how the story ends and it’s impossible to un-remember what we know when we’re trying to imagine how it might have felt in the past.

And that’s a story that’s told so many times in history as well, that like you get the biggest innovation, you get the most problem solving when the world is on fire.

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“I think one of the problems with studying history is that we know how the story ends and it’s impossible to un-remember what we know when we’re trying to imagine how it
might have felt in the past.” — Morgan Housel

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Joe: Right.

Morgan: It’s not when everyone is happy and everything is great. And everyone is gainfully employed. That’s not when people are innovative. Innovation comes when people are like, “This is bad. This is a big deal. If we don’t solve this problem today, we’re all going to die.” The best example of this is the most innovative period in human history was the Great Depression and World War II because those two things were the biggest problems in modern human history.

Joe: Right.

Morgan: Those were the biggest existential threats to our existence. So in the United States, the most productive decade ever was the 1930s. That was the birth of the supermarket, the shopping mall, the laundromat. All these things that made American life more productive occurred because you had all these businesses that were like, “If we don’t figure out a new way, we’re going to go out of business tomorrow.” And then World War II brought us penicillin and nuclear energy and rockets and jets and GPS and satellite and radar.

All these amazing inventions that happened because the whole world was like, “If we don’t, if we don’t figure out this war, we’re not going to exist next year.” So that’s when you always get the biggest innovations is when people are really scared. By the way, you could also say mRNAs is that with COVID. I also think it’s almost certain that we will look back 10 years from now, 20 years from now and realize that there was something amazing that came out of COVID, that happened because of COVID that that benefits all of us. It’s and I think it’s impossible to say what that will be yet. It’s always not obvious.

But my favorite example of this as I mentioned earlier is penicillin during World War II. Penicillin was discovered in 1929. And from 1929 until the early 1940s. We knew that there was this weird mold that could kill other bacteria but we didn’t really know what to do with it.

And then you had all of … During World War II, you had 13 million U.S. soldiers who were getting sick. And it was an existential crisis of like, “We got to keep these kids healthy. What do we do?” And we’re basically like, “Hey, we got this weird mold. Maybe we should turn it into a pill and give it to them.” The first doses of penicillin were delivered on D-Day.

Joe: Oh, wow.

Morgan: And the growth of antibiotics came because of the war. And I just think it’s always hard to predict what that’s going to be when you’re in the middle of a crisis.

Joe: There was another big thing that came out of the period following World War II that I thought was particularly interesting in how it affects people’s decisions around saving and investing and lifestyle today. And this was the theme that you were talking about, of: society got flatter, as far as income distribution. And there was a sense that the guy down the street who might have a very different job or income from you, was going to have a relatively similar lifestyle. Obviously not all. There were certainly many, many people who are still disenfranchised in our system at the time but could you just talk about what you saw there and what you think it means for people with their decision-making today around money?

Morgan: Yeah. The period for about 15 years after World War II, I think was really unique. I mean, during the war in the 1940s, it was pretty much codified into law, “You are not allowed to have a salary over X and if you are a business, your profits cannot be over X.” It’s pretty much just like a cap on everything. Of course, I’m generalizing but by and large, people were okay with it because the war was such an existential crisis.

Now, after the war ended, I think that philosophy and that ethos of, “if you are a CEO, you should not earn that much more money than your employee, not a crazy amount more than your employees,” kind of stuck around. And the top marginal tax rate in the 1950s was 91%. There were all these echoes of the war that kind of stuck around.

Of course, there are tons of downsides to that and negatives to that. And kind of a cap on innovation to that. That is a real thing. But one of the things that I just think is interesting that it did is it made it so that when people are trying to figure out where they stand on the economic hierarchy, and what people are anchoring their aspirations to, the distribution between outcomes was not that great. And that’s so different today when if you are a lower or middle-class worker today and you log into Instagram, your definition of a good life is a private jet, on a private island, with a Lamborghini and a huge mansion in the south of France. Like that’s the definition of a good life because there’s such a there’s so many people who are inflating the aspirations of everyone else.

Now, this is not to say that I think wealth inequality is good or bad. That’s a completely different argument. I’m just interested in what happened, which is that it was very flat in the 1950s, it made people anchor their expectations in a way that I think has been detached ever since. And I think the best way to summarize what happened over the last 70 years is that by and large, incomes more than doubled, adjusted for inflation, but their expectations and their aspirations grew more than that because there were so many people around them whose incomes and their lifestyles went up 10, 20, 30-fold. And so it’s just an interesting period when our incomes …

By and large, American middle-class families have done very well since the 1950s but their aspirations and expectations have grown by even more so it doesn’t feel like they have done that well.

Joe: How does that connect for you with the idea that the answer to what to do about avoiding a depression was to build a consumption based economy? So we’ve got these two things. We’ve got how we all thought we were going to have relatively similar outcomes and lives as far as what we could afford and do. And now we’re seeing only the extreme examples in fragmented media like Instagram or other social media.

So there’s that trend and then there’s also this: we’re building an economy that’s based on consumption. I remember in your book [you said] Truman mentioned going out and shopping but I remember after 9/11, that’s what President George W. Bush said to people, like, “What can we do? Should we do victory gardens? No. Go shop!”

Morgan: Go to Disneyland. Yeah.

Joe: Right, exactly.

So that seems to me like a powerful story that is swirling around for everyone as they make their financial choices. And so not only is credit easier but it might explain part of why we see some much indebtedness is that you think the way to a good life is to consume. And you think that you’re supposed to be able to consume to a level of those who are affluent.

Morgan: Yep.

Joe: And savings are invisible. I think you pointed out in your book. I don’t know if you have further thoughts that you want to share with the audience about, or your insights there?

Morgan: Yeah. I think one of the things that happens is if your income doubles but your expectations more than double, the only way to close that gap is through debt. If the guy down the street is sending his kids to private school and has two SUVs and goes on great vacations. And if you expect to live the same life as he does but you can’t afford it, he can afford it but you can’t. You’re going to close that gap with debt. Credit card debt, bigger mortgages, student loans and that’s what happened over the last 40 years.

Just an incredible rise particularly from the early 1980s to 2008, when everything burst. Incredible rise in household debt and I think a lot of that was just trying to close the gap between what people saw out in the world, what they aspired to, how other people were living, and how they expected that they deserved to live that lifestyle as well. And so it had a huge impact on consumer society.

Since 2008, what’s happened is really interesting, which is that for the first time in more than half a century, household debt payments as a share of their income has gone down. It’s gone down a lot. So there is some reversal of that trend but the biggest consumer economic trend of the last 70 years since the end of World War II was this massive leveraging of household debt. And I think most of that was just people trying to keep up with the Joneses, so to speak.

Joe: I’m wondering about the impact of that and also the chasing after the larger homes, which is part of what’s been going on. And it reminded me of your man in the car paradox. I wondered if you could share that story?

Morgan: Man in the car paradox is … when I was in college, I was a valet at a really nice hotel in Los Angeles. It was a really cool job. I did it for many years. And I noticed over time that if somebody pulled into the hotel driving a Ferrari, driving a Lamborghini, driving a Rolls Royce, never once did I look at the driver and say, “Wow. That guy’s cool.”

Joe: [laughs]

Morgan: What I did is I imagined myself as the driver and I thought, “If I had that car, people would think I’m cool.”

Joe: Yeah.

Morgan: “Everyone would be looking at me.” My 19-year-old self, that’s what I imagined. And it took me a while to figure out the irony of [thinking] I don’t care about the driver.

Joe: Right, right.

Morgan: But I think if I was the driver, people would care about me.

Joe: Right. It’s so weird.

Morgan: And no, nobody cares about the driver but everyone who’s driving a Ferrari, driving down the road, they think, “Everyone’s looking at me. Everyone thinks I’m cool.” And they don’t. They’re thinking about themselves. The takeaway from that was just like, “Nobody is thinking about you as much as you are.”

Joe: Right.

Morgan: And when you really wrap your head around that then I think your aspirations for material, like waving your peacock feathers really goes down in a healthy and enjoyable way. It’s not to say … I like nice cars. I like nice homes. This is not saying to live like a monk. But when you realize how little social benefit you get out of being flashy and how much irony there is there about how much attention you’re getting when everyone else is actually just thinking about themselves. Then I think it really reduces in a great way.

Joe: So obviously you are prioritizing less things related to what you imagine could be ego related, you know, material possessions and all that. But you are prioritizing more this idea of controlling your time, right? Tell us about that. What does that mean for you?

Morgan: Well, there’s two things that you can do with money. You can spend it on stuff and spend it on services. Buy some stuff with it. Or I think you can save it and invest it. And then the question is: well, what does my savings do for me?

Joe: Right.

Morgan: If I’m just going to make money and not spend it, what does it do? And some people use that as like a “gotcha” question of like, “What’s the purpose of money if you’re not going to spend it?” To me, there’s actually a really great answer which is, what savings does is it gives you independence and autonomy. It makes it so you don’t have to necessarily rely on other people. You’re not beholden to a boss that you don’t like. You kind of can gain control over your own time and you can make your own decisions.

And that to me is a massive benefit. And I think for most people you’re going to get more benefit out of that independence and autonomy than you will from buying more material stuff.

Joe: So I can see how savings protects you from the vagaries of life, the unforeseen circumstance, the thing that just hits you, knocks you sideways. And if you’ve got savings now, you know, you can protect against those things that money can help with. How does having investment give you control over your time aside from that? Like practically speaking, let’s say you’ve talked to somebody and they’re working. And they’ve been saving now the way that you’re suggesting for five or 10 years. What might look different in their life then?

Morgan: Well, here’s, here’s a really common conversation that I’ve had with people and a lot of people have had this conversation with people that they know. You talk to a friend and the friend says, “I hate my job. I can’t stand my job. It’s miserable.” And then you say, “Why don’t you leave?”

Joe: Yeah.

Morgan: And they say, “I can’t go one week without a paycheck. I can’t do it and therefore, I’m kind of stuck right here.” Now, if you had that conversation with someone who just had a bunch of money sitting in the bank doing nothing, not spending it. That person can say, “I hate my job and I’m going to quit.” “Where are you going to go next?” “I have no idea where I’m going to go next. I might take the next three months to look for a good job that I like. I might have to move somewhere else. I might move to a closer location so I don’t have to commute.” Taking that pressure off your shoulders is not a little thing. That is a life-changing amount of de-stressing that I think can really completely alter people’s lives. And it’s something that’s easy to overlook when you tell someone to just save your cash in the bank where it’s losing money to inflation.

The other thing is you had mentioned the vagaries of life that all the banana peels of life that everyone’s going to slip on, whether it’s a medical emergency or your car breaking down or a divorce or whatever it might be. That having financial flexibility is not just a little benefit.

Joe: Which to your point earlier about so many of our decisions are psychologically grounded. That’s going to have a knock-on effect in all kinds of decisions in your life. Your parenting is going to be better because you’re not as stressed about that. Your relationship with friends, your involvement in your community or in civic organizations or church organizations is all going to be different because you’re going to show up with a different level of stress, worry, anxiety, all of that.

Morgan: Completely.

Joe: Yeah. it’s a fascinating thing but this problem of it being hidden. You don’t see it with other people. You’re not normed to it by Instagram. You don’t know that that’s what’s going on. I think it makes it really hard for people to even know that, “Oh, I should be pursuing that. I should be pursuing my peace of mind and my capacity to respond to unforeseen circumstances.”

Morgan: Yeah.

Joe: Obviously we think a lot about educating kids about decision-making so we’re constantly thinking, “All right. How do you help them sort out their values?” because a lot of what we’ve been talking about today, we’re really talking about people’s values. When you go to make a decision, reject monisms, right? It’s not one thing you’re trying to solve for, it’s multiple things.

And how do you weigh those and how do you decide what you’re going to do with regard to the job or the moving somewhere, where to go to school, whether to go back to school, whether to get divorced or not. All of those things they’ve got so many components and so many competing values or aligned values involved in them.

Morgan: They’re also … they will be the most important decisions that you make in life but all of those things that you just mentioned: should you go back to school? Should you get divorced? Those things are not taught in schools in any way whatsoever. Even if it’s by far and away the most important decisions you’ll ever make in life.

Joe: Yeah. When you think about that in your own dawning realization, whenever it started for you, about the importance and role of decision-making in your life, what are the things that you wish the next generation knew? What do you just think, “Oh, man. Get these two or three ideas to every kid”?

Morgan: I don’t know if it’s actually the most important but I think it’s so easy to ignore how adaptable people are. And it’s very easy, particularly when you’re young, to say, “If I make the wrong decision here, my life is ruined. If this doesn’t work out, if my girlfriend leaves me I’m never going to recover.” That’s the common one. And people ignore how adaptable they are to change and how much they can adjust to their circumstances and figure things out. My advice to myself looking back, if I was to talk to my 15-year-old, 19-year-old self, my advice would be to say, “It’s all going to work out. That’s not to say that things, everything’s going to be good, that everything’s going to be easy, that everything’s going to be fun. It’s not that. But it’s all going to work out. Everything is going to be okay.” Even the things that were like terrible events in my life, it all worked out okay. And I think not for everyone but for most people that’s the truth.

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“… it’s very easy, particularly when you’re young, to say, ‘If I make the wrong decision here, my life is ruined. If this doesn’t work out, if my girlfriend leaves me I’m never going to recover.’ That’s the common one. And people ignore how adaptable they are to change and how much they can adjust to their circumstances and figure things out.” — Morgan Housel

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Joe: Yeah.

Morgan: And again, that doesn’t mean there’s not going to be crazy difficult things along the way but by and large, it all works out because people are so much better at adapting than they assume they will be when they’re in the heat of the moment. I think that idea is related to decision-making in a way that might be a little bit de-stressing for you.

Joe: Relatedly the idea that the trend is your friend … If you think about the resources that are available to most people from now back to when we were kids, you know, whether it’s the Zoom that we’re on right now, the cell phone that we’ve got, the kind of choices we have, the apps to help me not get lost as easily, the quality of life seems to me to be a trend you can’t spot in a moment. But most things are going to for most people be getting better over the journey of their life.

Morgan: Totally. I have no idea how anyone survived without Google Maps especially when they’re traveling.

Joe: [laughs]

Morgan: … And that’s like, that’s like 10 years ago or something. That’s like really recent and to me, it’s unfathomable that I could go to a new city in a car and … what do people … do people just … actually don’t know how people did it before Google Maps. I don’t remember. But there’s so many little things like that. And in 10 years from now, there’ll be more of that, that we will look back and say, “How did you and I survive in 2022?”

I can’t even fathom it. I think that’s always the case. That’s what’s so fun about innovation.

Joe: I absolutely agree. So we’re getting close to the end of our time and I’m wondering if there’s a piece of advice around financial decision-making that you would like to share with our audience? And those are adults obviously. We usually talk about kids at the Alliance and what we’re doing for them but this podcast is really for the adults. So any piece of advice you’d like to share?

Morgan: Well, the advice for kids … and this will get into the adult advice. The advice for kids for investing is, “Time is in your favor. You’ve got half a century in front of you to invest.” Everyone’s heard that before. The advice for adults is really to accept that reality with both hands as well. And I say this because there are a lot of investors who might come to a financial advisor at 60 or 70 years old and say, “I haven’t saved very much for retirement but now I know I’m in trouble. I need to get into it.” And a lot of them will take way more risk than they can handle because they’re trying to “make up for the time lost.”

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“The advice for kids for investing is, ‘Time is in your favor. You’ve got half a century in front of you to invest.’ Everyone’s heard that before. The advice for adults is really to accept that reality with both hands as well. And I say this because there are a lot of investors who might come to a financial advisor at 60 or 70 years old and say, ‘I haven’t saved very much for retirement but now I know I’m in trouble.
I need to get into it.’ And a lot of them will take way more risk than they can handle because they’re trying to ‘make up for the time lost.’” — Morgan Housel

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And I think that can just lead to devastating results. So the same advice that you give for kids, “time is on your side.” If you are at later stages in your life, you need to embrace with both hands that sometimes it’s not on your side anymore.

And that’s, that’s okay. And I think embracing that and accepting it rather than ignoring it [or] by taking way more risk to make up for it, is a much bigger mistake than it’s going to be in just accepting the reality of the situation.

Joe: Oh, I appreciate that especially since I just had my 50th last week so …

Morgan: Congratulations.

Joe: … [laughs] I’m definitely feeling that one. So I’m wondering, Morgan, is there anything you’re working on you’re particularly excited about that you’d like to share with our listeners?

Morgan: I just like reading about all kinds of different topics that have nothing to do with investing. And just trying to pull out and figure out a new little insight about how people think about money. That’s what I spend most of my time doing. And that’s what I hope to be doing for many years to come.

Joe: Oh, [laughs] I hope you get to do it for many years to come. Reading your writing is a treat as has this been. We ask everyone who comes on the podcast what single book would you recommend as priority reading for listeners keen to improve their decision-making?

Morgan: There’s a book by a journalist named Dan Gardener who wrote a book called The Science of Fear. It’s actually not that popular of a book but I think it’s wonderful. I think it’s such a good read on this topic because when people are making decisions some of the most important decisions are going to occur when you’re scared. And he does such a good job of just explaining the nuance of what happens when we are scared, when there’s fear in the decision-making process. I got a lot out of that book and I’d recommend it.

Joe: The other one I’ve been asked recently if we could ask for more recommendations about things related to probability and statistics. And how those should show up in our decision-making. Is there anything you think is accessible for a broad audience that’s new to that topic?

Morgan: The book, How To Lie With Statistics is a great one. An old classic book. It’s hilariously written. It’s nearly a comedy book but it just really shows how you can kind of fool people with numbers. And I think particularly when you’re making decisions with money, there’s so much marketing in the money field, in the investing space, in the personal finance space that if you can gain some insight into how people can trick you with numbers and become a little bit less gullible, that’s a great financial skill.

Joe: Ah, I appreciate it. All right, well, we’ll put those links and any others or mentioned during the podcast up on the website. Morgan, I just want to thank you so much for coming on the podcast. If listeners want to go online and learn more about your work or follow you on social media, where should they start?

Morgan: I spend most of my time on Twitter. My handle is @morganhousel, my first and last name. That’s where I spend most of my life.

Joe: All right, we’ll put that on the site too. That’s great. And as I said, any books or articles mentioned in today’s show we’ll put on the site as well as the show notes on the Alliance website where you can also find a transcript. So thank you very much, Morgan. Wonderful to have you here today.

Morgan: Thanks for having me.