The Psychology of Money Chapter 11: Reasonable > Rational

Julius Wagner-Jauregg was a Nobel Prize winning physician who, in the early 1900’s before the invention of penicillin, learned how to treat neurosyphilis. It was often fatal, but Wagner-Jauregg increased the survival rate from 30% to 60%. Believe it or not, he accomplished this by injecting his patients with another disease: malaria. He found out that if patients had a high fever (which occurred with malaria), the fever would also help kill the neurosyphilis and double their survival rate.

Housel further explains that, in the medical community, it’s a commonly known fact that to a certain degree (pun intended) fevers are good in that they help our bodies heal. But how many of us reach for Tylenol as soon as we or our children get achy and sweaty? In these instances, taking medicine might be reasonable, if not entirely rational.

With our financial decisions, Housel advises: “Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money. [...] There are few financial variables more correlated to performance than commitment to a strategy during its lean years.” Specific to investments, we might ask if a particular investment plan will work as we intend. With good plans the answer can be “yes,” but only if we stick with the plan when it feels like a bad plan (when your investments are not performing as well as you’d like, as well as “the market”, as well as your neighbor, etc.).

Rather than seeking to simply be a spreadsheet or calculator, investing success could actually be because of, not in spite of an “irrational,” emotional attachment to a certain investment company or strategy. If the key is sticking with a plan, and sticking to the plan is aided by those silly emotions that don’t fit into calculators or spreadsheets, then we can welcome and harness them for our benefit. Harry Markowitz, another Nobel Prize winner and the father of Modern Portfolio Theory invested some of his own money aiming to minimize the feeling of regret (not his professional theory), and John Bogle, the founder of Vanguard who preached low-cost index investing invested with his son who became a high-fee hedge fund manager. Both were to smaller degrees, but they enabled enough emotional attachment to give these two famous investors the wherewithal to stick to the plan with the rest of their investments for the long run.

I’d love know

• Do you have any emotional attachments to particular investments or companies (stocks bought by your parents, an annuity left from a spouse, an insurance policy bought from a friend)?

Until next time, happy reading!