The Psychology of Money Explains Why Smart People Go Broke — And Why a Janitor Died a Millionaire

The Psychology of Money explains why intelligent people go bankrupt and why a janitor became a millionaire.

When you hear a story for the first time, it doesn’t make sense. In rural Vermont, a man worked for 25 years repairing cars at a gas station and another 17 years sweeping floors at a JCPenney. He paid $12,000 for a two-bedroom home where he lived alone. Friends say that chopping firewood was his favorite pastime. After losing his wife, he never got married again.

He received no attention at all, made no headlines, and did not participate in any interviews. When Ronald Read passed away in 2014 at the age of 92, those who knew him were simply perplexed to discover that he had surreptitiously amassed over $8 million, the majority of which he bequeathed to the local library and hospital.

Richard Fuscone was breaking a completely different kind of news at the same time. Fuscone, a former Merrill Lynch executive with an MBA from Harvard and a spot in Crain’s “40 under 40” list, was everything the financial industry required. In his forties, he had retired. His mansion in Greenwich had seven garages, two swimming pools, eleven bathrooms, and a monthly maintenance bill of more than $90,000. Then came 2008.

He was left with nothing due to high debt and assets that were difficult to sell. He allegedly said, “I currently have no income,” to a bankruptcy judge. Fuscone’s mansion sold for 75 cents on the dollar at auction five months before Read discreetly donated his wealth.

It’s difficult to ignore that contrast for a long time. same time period. totally different results. One man had all the advantages money could buy, while the other had very few. Intelligence was not the variable. It had nothing to do with connections, education, or access. Behavior was more subdued and more difficult to teach.

This tension is the central theme of Morgan Housel’s 2020 book. According to his perspective, the psychology of money is not about compound interest rates or spreadsheets. It’s about the reasons behind people’s financial decisions, which frequently go against their own apparent interests while they think they are acting entirely rationally.

Housel makes a strong argument that human behavior influences financial decisions far more than raw data ever could, according to The Financial Times. Almost nothing in traditional finance education actually teaches this kind of observation, even though it seems obvious once someone says it aloud.

During his college years, Housel worked as a valet in a hotel in Los Angeles. He witnessed a tech executive, intelligent enough to have patented Wi-Fi router components in his twenties, toss gold coins into the Pacific Ocean as a game, tip wads of hundred-dollar bills, and give a hotel manager five thousand dollars for a five-hundred-dollar lamp just to show that he could. Housel found out the man had gone bankrupt years later.

It’s almost too obvious to imagine those gold coins skipping across the water, but it did happen. It’s possible that no classroom could have taught that executive what no one seems to have ever done: that one of the more reliable ways to have none is to destroy wealth in order to appear wealthy.

Finance is viewed as a mathematical problem. The six-month emergency fund, the 10% savings rule, and the historical return rates on index funds are all examples of personal finance advice that begins there. The figures are accurate. However, there is a huge gap that exists only inside a person’s head between knowing what to do and actually doing it.

Despite its intelligence, the financial sector seems to have continuously underestimated that disparity. Financial engineering used to be the most popular major offered by Princeton’s School of Engineering. Whether any of that resulted in better investors or just more clever ways to lose money more quickly is still up for debate.

Housel emphasizes something counterintuitive, according to The Economic Times: true wealth is largely invisible. It doesn’t show up on social media. Neither the watch on a wrist nor the car parked in the driveway exhibit it.

It resides in the discrepancy between an individual’s income and their spending choices, which Ronald Read widened annually for decades while discreetly buying blue-chip stocks and waiting. A janitor’s small savings became eight million dollars thanks to that perseverance, which compounded over time. Not a secret. No inheritance. Just patience and self-control.

This narrative appears to be intellectually understood by investors. Fewer people genuinely experience it. When markets decline or a portfolio shrinks while family expenses become urgent, the math fails and psychology takes over.

Housel contends that return calculations are not necessary to comprehend why people sell at the bottom of a bear market. You must know what it’s like to look at your family and question whether your financial decisions are failing them.

The book’s insistence that these are not specialized issues is what sets it apart. Like health, money affects everyone, regardless of interest or intent, according to Housel. However, despite its increasing sophistication, the financial sector has not clearly yielded better results, in contrast to the medical field.

Compared to previous generations, we are neither obviously less likely to have harmful debt nor better prepared for retirement. There’s something lacking. As it happens, that something is a serious examination of how people behave in reality as opposed to what economists predict they will.

Because it requires people to examine their own emotional relationships with spending, saving, fear, and status, the psychology of money is an uncomfortable topic. A formula is what most people would prefer to study. Formulas don’t pass judgment.

However, compared to almost any investment model, the janitor who chopped firewood and left millions to strangers is a more instructive figure and much more difficult to ignore.