When we talk about finances , we will mostly think about numbers, math, and spreadsheets.
Most of the problems we have with our personal finances, however, are not solved on a spreadsheet, or with arithmetic or algebra, not even necessarily with numbers. They are solved by knowing our behavior in different situations, the way our brain works, our psychology .
To save successfully, for example, it is not enough to know the inflation rate and know how to calculate the amount we will need in the future. It’s also extremely important to keep our goals in mind and stay inspired to keep saving month after month.
To invest successfully, it is not enough to know the average performance of an index and make the asset allocation according to our investor profile. It is essential to know that our brain has evolved to seek immediate rewards, to flee from temporary losses, and not to take into account the future. All characteristics of a terrible investor.
In addition, humans are not completely rational, we are also emotional. We are not robots, we are not spreadsheets, we feel fear, we feel anger, we feel envy.
Morgan Housel, in his book “How the Rich Think” ( The Psychology of Money in English, a much better title in my opinion) says that we should not aspire to be coldly rational when making financial decisions, but rather that we should aspire to be quite reasonable . Being reasonable is more realistic and we will have a better chance of long-term success.
I love it, because being completely rational is not achievable, not for a homo sapiens, and trying to be one can have terrible repercussions.
Being rational versus being reasonable in saving
When it comes to savings we can apply this idea of being reasonable over being rational in the sense that maximizing savings sounds like the best idea, mathematically speaking. Do not spend more than necessary and save as much as we can.
Again, rationally this sounds good, but it is not realistic, it is not reasonable. Shannon Lee Simmons, author of the book ” Worry Free Money” likens …….