"Do not aim to be coldly rational when making financial decisions. Aim to be pretty reasonable."
If you go to a Financial Advisor or use an Excel Sheet, they will treat you like a robot. They will tell you to always make the decision that maximizes the numbers.
But in Chapter 11 of The Psychology of Money, Morgan Housel drops a truth bomb that goes against every textbook:
"You don't need to be Rational. You just need to be Reasonable."
Being "Rational" means doing what is mathematically perfect. Being "Reasonable" means doing what lets you sleep well at night. In the long run, the person who sleeps well wins.
1. The Mortgage Dilemma: Math vs. Emotion
Let's take a scenario every Indian faces. You have a Home Loan at 8.5% interest. You also have spare cash.
The Rational Choice (The Robot):
"Don't pay off the loan! The interest is only 8.5% and you get tax benefits. Invest that cash in a Nifty 50 Index Fund. It will give you 12% returns. You will make a profit of 3.5% (Arbitrage)."
The Reasonable Choice (The Human):
"I hate debt. I hate owing money to the bank. I know I can earn more in stocks, but paying off this loan will make me feel free. I will pay it off."
The Verdict: On paper, the Robot is right. But in real life, the Human is right. Why? Because being Debt-Free gives you a peace of mind that no Excel sheet can measure. If paying off the loan helps you sleep better, it is the correct financial decision, even if the math says otherwise.
2. Why We Take Paracetamol
Biologically, a fever is your body's way of fighting a virus. Raising body temperature kills the bacteria. So, Rationally, you should let the fever run and suffer to heal faster.
But Reasonably, we take a Paracetamol. Why? Because shivering and hurting is miserable. We sacrifice a little bit of "efficiency" for "comfort."
The same applies to money. Keeping 6 months of cash in a Savings Account (earning 3%) is inefficient compared to a Liquid Fund (earning 7%). But if seeing that cash balance instantly gives you comfort, then the "Loss" of 4% is the fee you pay for sanity.
3. Consistency > Perfection
The problem with 100% rational strategies is that they are boring and hard to stick to. And in finance, Consistency matters more than Perfection.
If you love trading stocks or buying Crypto, a Rational Advisor will say "Stop it! Buy Index Funds."
But a Reasonable Advisor will say: "Okay, take 5% of your money and call it your 'Fun Fund'. Trade with it. Gamble with it. Do whatever you want."
Why? Because scratching that itch with 5% prevents you from getting bored and gambling with the other 95%. It keeps you in the game.
4. The "Sleep Test"
The best financial plan is not the one with the highest return. It is the one you can stick to when the market crashes 30%.
If a "Rational" portfolio is 100% Equity, it will crash hard. You might panic and sell everything at a loss. But a "Reasonable" portfolio might have 20% Gold or FD. It returns less profit, but it doesn't crash as hard, so you don't panic-sell.
You survived. And survival is the key to compounding.
Key Takeaways
- You Are Not a Spreadsheet: You are a person with emotions, family, and fears. Optimize for happiness, not just ROI.
- Love Your Investments: If you don't "love" your strategy (e.g., dividends, gold), you will abandon it in tough times.
- Be "Pretty Good": You don't need to be perfect. You just need to be "not stupid" for a very long time.
Frequently Asked Questions (FAQ)
Q1: Should I prepay my Home Loan?
A: If the interest rate is high (>9%) or if the debt stresses you out, YES. The psychological freedom is worth the mathematical loss.
Q2: Is it okay to keep cash at home?
A: Rationally? No. Reasonably? Yes. If having ₹50,000 in your cupboard makes you feel safe, do it. That feeling has value.
Q3: What is "Behavioral Finance"?
A: It is the study of why people make irrational money decisions. Understanding your own behavior is more profitable than understanding market charts.
Up next: Chapter 12 – Surprise! (Why history is a bad guide for the future).
📚 Credit & Disclaimer:
This post is a summary based on the bestseller "The Psychology of Money" by Morgan Housel.
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