The Psychology of Money

Housel compares investing to blackjack, which is a “game of odds, not certainties” (124). He advises the reader to cope with the unpredictable nature of finance by always allowing a “margin of safety” in their money planning. This concept, which Housel credits Benjamin Graham with inventing, is the only way to ensure that one can participate in the financial world without risking ruin. The author laments how people’s biases can cause them to underestimate risk or expenses. He cites a study by a Harvard psychologist, which demonstrated that people are much more critical of other people’s budgets than their own.

Housel claims that the concept of “room for error” is underappreciated and that it is an essential part of guaranteeing financial survival, as it allows one to enjoy the benefits of long-term saving and compounding (126). Housel advises the reader to consider not only what losses they could financially afford, but also what they could endure emotionally. He calls leverage, which is the practice of “taking on debt to make your money go further,” the “devil” since it can lead to financial ruin (129). Another financial hazard is what Housel calls “single points of failure” (132), or problems that completely halt progress.