CODEXCard 3 of 7 · The Psychology of Money
Reasonable vs rational investing (Reasonable, Not Rational)
A plan you can stick with beats an optimal one you can't.
Reasonable versus rational is Morgan Housel's way of describing the gap between textbook finance and real people. A rational plan maximises expected return on paper. A reasonable plan is one that a human being, with fears, family pressures and bad weeks, can actually live with over the long run.
Housel's reasoning is that behaviour determines results. Markets reward people who stay invested and keep saving through good and bad periods. If a strategy is so aggressive or complicated that you panic and quit at the first downturn, its theoretical edge never arrives. A slightly less efficient choice, such as holding more cash than a model suggests, can be the better one if it lets you sleep and stay the course.
The pitfall is using reasonable as cover for never improving anything. Choosing a plan you can follow is the starting point, not the finish line. Once you are consistently sticking with it, you can refine it, lower its costs, or adjust its risk over time. A plan that exists only on a spreadsheet cannot be refined at all.
This idea links to Housel's card on volatility, since emotional tolerance for swings is often the factor that decides whether a plan survives.
Example
A financial model tells a young couple to put all their savings into stocks. They know a big drop would scare them into selling, so they choose a mix with a cash cushion for emergencies. Through two rough years they keep investing every month, which matters more than the extra theoretical return.
Try it this week
Ask yourself honestly whether you would keep your current plan through a large market drop, and adjust it until the answer is yes.
From The Psychology of Money (Morgan Housel · 2020).
