Peer Review #1: The Psychology of Money by Morgan Housel

Welcome to the first post in this blog’s peer review series, in which I distill the lessons of other personal finance resources, succinctly summarize their key lessons, and apply them to typical academics’ financial lives. There is no order to these posts; this just happens to be the book I read most recently when I decided to start the series.

If you’d like to buy a copy of this excellent book, you can get it at the link below. (Note that as an Amazon affiliate I will receive a small percentage of this sale, which will not affect the price you pay. Also note that I will never link to books that I do not think are worthwhile!)

Core Arguments

This book’s core thesis aligns closely with this blog’s: that how well you do financially given your available resources has relatively little to do with your intellect and relatively more to do with your psychology. As Degree-Certified Smart People, academics should all be doing great with their personal finances relative to others with similar incomes and intergenerational advantages, right? It’s hard to find hard data on this exact question, but anecdotally, I find that lots of professors feel a strong sense of confusion and shame when it comes to money. Even the quants. Even those who are masters of their highly complex academic domains. I felt the same way myself before reading and listening to every book, podcast, and blog that I could find that seemed like it would help me get my financial life in order in the last few years.

If that sounds like you too, Morgan Housel has a lesson for you:

1. You’re not alone, and you’re not crazy.

You’re applying your own life experiences, lessons distilled from the actions and words of your forebears, and what seems to you to be reasonable decision-making logics to your financial life, the same as everyone else. In addition to that central lesson, he also wants you to appreciate a number of things about money and financial decisionmaking that many don’t, including Degree-Certified Smart People:

1. Luck plays a huge role in financial fortunes’ — yours, and others’. So don’t get too cocky if you’ve had some success, and don’t get too down if you’re struggling.
2. No matter how much you have, it will never be enough.
3. Compounding and associated geometric growth rates defy our brains’ linear instincts. Failing to account for compounding’s magic undergirds much of our poor financial decisionmaking.
4. Earning money requires taking risks, but keeping money requires managing them within a margin of safety.
5. A comparatively small number of events determine financial fortunes — of companies, and individuals.
6. Freedom of daily action is the ultimate expression of wealth.
7. You may feel pressure to keep up with the Joneses, but really nobody thinks you’re any cooler for having flashy stuff.
8. When you see others with flashy stuff that you don’t have, remember that wealth is largely what you don’t see.
9. You don’t need a reason to save. You’ll always be glad you have financial flexibility.
10. Your finances don’t need to be optimal — just reasonable.
11. Economic surprises should be expected. Don’t rely on history too much.
12. For the same reason, don’t be too locked in on one vision of the future. Leave room for error.
13. Don’t commit yourself to financial extremes — recognize that change is a constant, including in our own needs and desires.
14. Financial risk is the price of reward. Trying to avoid paying it will generally go badly for you.
15. When considering adopting the behaviors of others, make sure you know whether their financial goals are the same as yours.
16. Optimism is a better bet than pessimissm. Don’t try to outsmart the world, and don’t value reasonable losses more than gains.
17. Don’t buy too much into specific short- or intermediate-term forecasts. Think in probabilities.

The final two chapters summarize the main lessons above and then outlines the author’s own approach to investing (managing lifestyle creep, investing via dollar cost averaging into domestic and international low-cost index funds, taking advantage of tax-advantaged accounts — all stuff I discuss in greater detail elsewhere).

Lessons for Academics’ Finances, Careers, and Lives

I think a few of these lessons apply particularly well to academics.

No Ragrets

First, as we progress in our careers, many of us gradually realize, or gradually fully appreciate, what a financial hit we took by getting a Ph.D. We lost our most important savings years if we didn’t invest while we were in graduate school, often requiring us to continue to live like a grad student or postdoc to catch up in our late 20s and 30s. Furthermore, if we remain in academia, we’ve also often capped our earning potential relative to the broader job market for workers with our talents and skills. Most people find that these issues become more important to them as they leave their 20s (when most Ph.D.-getting decisions are made) and enter their 30s and 40s. It certainly did for me, and probably does so even more strongly for those who have children. This book’s core thesis that neither you nor anyone else is crazy in their financial decisionmaking is a helpful reminder not to be too down on yourself. And remember, if you’re as fortunate as I am, you have earned yourself lifetime employment with flexible hours studying and teaching on topics that deeply interest you, or at least once did. This is not a bad life at all, and you should appreciate your younger self for working so hard to get it for you, even if you have some regrets about the tradeoffs. If you’ve not been so fortunate, or regardless, remember that you still have choices available to you at any career stage, and all you can ever do at any given time is make the best choices you can with the information, resources, and experience you have available to you. You are where you are — just take the next step without recrimination.

As with Money, So with Academic Careers

Second, I think this book’s lessons about the role of luck in financial success and the psychology of endless comparison apply very aptly to academic careers. Too many of us rest on our laurels for our most highly-influential insights or thesis of which we are most proud, and cite our hard work and brilliance as the reason why we’ve climbed to whatever rung of the ladder we’ve reached, and why those who have been less fortunate didn’t. Too many of us, often the same people, also endlessly compare ourselves up the ladder, complaining that those in our field with more desirable positions or more widely-influential books and articles aren’t as deserving of their success as they seem. We do both of these things to varying degrees no matter which rung of the ladder we’re on. We minimize the role of luck in our careers and those of those below us, and maximize it in those of those above us, and no amount of personal career success is ever enough to forestall this dynamic. It’s a path to never being satisfied with your own lot and never learning to treat your colleagues and students with graciousness and support. Resist it.

Maximize Your Potential Compounding

Perhaps the biggest hidden financial cost of getting a Ph.D. is the foregone ability to invest in your 20s. Money invested at age 25 will ultimately be worth about double money invested at age 35. Unfortunately, most Ph.D. holders were scraping by on just above poverty wages in their 20s and likely had little leftover to invest for their retirement, thus missing out on much of the enormous power of compounding that Housel discusses at length.

Elsewhere in the blog, I outline three potential solutions to this fundamental issue of the academic life course:

1. Keep living like a grad student or postdoc after graduation, and invest the rest to catch up.
2. Take advantage of the financial buffer that low-interest federal student loans can provide to invest some of your graduate school stipend, preferably in a Roth IRA.
3. If you know you want to go to graduate school, work during years first and save heavily to reach Coast FIRE.

Your Compensating Differentials are Enormous

The concept of compensating differentials in economics holds that rational actors in the market may be willing to forgo wages for other good things, or require higher wages to accept bad things, in their labor force activity. If you have a tenure-track or tenured position at a university, this book should remind you with a bolded, all-caps headline that to varying degrees, you have some major, highly-enviable compensations for your likely below-market wages in the form of numerous freedoms:

1. What you research
2. Which professors and students you collaborate with
3. How long you work, starting and ending when, and in what location
4. When you take vacations and how long you take them for
5. What you teach
6. What service roles you seek and accept

I’m not saying that these freedoms are unlimited. If you decide you don’t want to teach classes anymore but your contract requires it, you’ll quickly get fired even if you’re tenured. If you decide you want to research something completely unrelated to the core subjects of your current department, you might eventually be strongly encouraged to seek employment elsewhere. In smaller departments, you likely have less flexibility on what you teach and on what service assignments you accept. However, I am saying that you likely have much more of these freedoms than equivalent workers in government or industry. As the book argues and scientific research supports, freedom over your time is one of the strongest predictors of happiness. If your family’s basic needs are met and the work you need to do to get more money comes at the cost of your / their happiness, to me that is a bad tradeoff. Don’t forget to appreciate what you have!

You Don’t Need to Become a Financial Expert

I think one reason that many academics hesitate to do the work to improve their financial lives is that they already know the work it takes to become an expert in one field — 5 to 8 years to get a Ph.D. plus years of postdocing and assistant professoring to become fully established in their expertise. Who has the time to do that in a completely unrelated topic when there are syllabi to prep, students to mentor, committees to serve on, papers to write and review, and grants to submit?

Well, the good news is that you absolutely don’t need to become a financial expert to dramatically improve your personal finances. The things you should do that will matter most can be succinctly summarized and would easily be covered in a personal finance 101 course:

1. Know they numbers so you can spend significantly less than you earn
2. Invest the difference in low-cost index funds of stocks and bonds in a tax-advantaged retirement account, and continue to do so for decades until retirement
3. Avoid high interest debt
4. Anticipate and save/insure for intermediate-term costs/risks, both expected and unexpected
5. Define your financial goals and align your decisions with them as much as possible

If you do all of that, you’ll be far better financially positioned than most. After you’ve done those things, there is always more to learn and do if you want, but you don’t have to — you’ll be on the path to financial freedom. Anything that meets the criteria above can readily be considered reasonable and therefore perfectly acceptable in Housel’s (and my) book.