The Psychology of Money: The Real Reason Perfect Investment Plans Ruin You

Have you ever made a “perfect” investment plan, only to panic and sell everything when a market crash hits? Honestly, I have. The spreadsheet in my head screams, “This is the opportunity!” but my heart feels like it’s about to burst, and my fingers betray me by hitting the sell button… It’s a sad cliché that repeats itself in financial markets.

Everyone around who invests seems smart and analytical. So why are the results so wildly different?

The investing sage, Morgan Housel, may have given us the answer in The Psychology of Money: “Being reasonably rational beats being perfectly rational.” What does that mean? It means that a ‘looser’ strategy that acknowledges human frailty and can be consistently maintained in any situation ultimately wins over the mathematically perfect strategy.

Maybe your investment struggles aren’t due to lack of analysis but because you chased too perfect a ‘rationality.’ Now, let’s turn off those complicated spreadsheets for a moment and dive into the real story of investment psychology.

Why Can’t We Stick to Our Plans? 🤔

There’s a character in traditional economics textbooks called ‘Homo Economicus.’ This is a human who always acts perfectly rationally for their own benefit—like an AI. Your investment plan is basically this character’s work.

But what about real life? Like a gym membership you quit after New Year’s resolutions, we easily abandon plans when faced with immediate temptation or fear. In the world of money, these emotional waves are much stronger.

🔖 Useful Psychology: Loss Aversion Behavioral economists have found that humans feel the pain of losing 1 million won about 2.5 times more intensely than the joy of gaining the same amount. That’s why profits feel like “not bad,” but losses feel like the world is collapsing.

This psychological trait leads us to make the worst choices when markets shake.

• Anchoring: We obsess over the price we bought at, unable to sell and just stewing in frustration.
• Herding: When others sell, we panic, thinking, “Am I missing something?” and follow suit.
• Confirmation Bias: In a downturn, we only seek pessimistic news to justify our fears.

In the end, what we need isn’t an F1 race car (perfect strategy) but a sturdy 4WD truck (reasonable strategy) that quietly keeps going through any rough road or storm.

The Divergent Fates of Two Investors 👥

To truly understand the power of ‘reasonableness,’ let’s look at a fictional story of two characters: ‘Rational Ron’ and ‘Reasonable Rachel.’

Ron’s failure wasn’t due to lack of skill but ignoring his own ‘human’ emotions. Rachel’s success wasn’t from market timing but from accepting her frailty and building psychological safeguards.

Your Brain vs. Algorithms 🤖

Let’s be honest: the modern financial market is a brutally unfair playing field for individual investors.

Our real opponent isn’t a person. Most market trades happen at millions of times per second by high-frequency trading (HFT) algorithms—traders with steel hearts, no emotions, no fear, no greed. Add 24/7 news stimulation, and it’s nearly impossible for an emotional individual to win short-term battles against these cold algorithms.

⚠️ Warning: Your emotions are algorithm food The moment you panic and hit sell, algorithms quietly ride that wave of emotion to take your money.

So what do you do? Simple. Don’t get in the ring to fight. Play a different game. The only and strongest weapon individual investors have is time. Give up short-term prediction games and hold good assets with a ‘reasonably rational’ strategy for the long haul. That’s our only winning method.

Building Your Unshakable Fortress 🏰

How do you build a ‘reasonably rational’ investment fortress that protects you through any storm? It’s nothing grand.

💡 Rule 1: Please, sleep well. Before investing, ask yourself, “How much can I lose and still live my daily life?” Investments that keep you awake at night are always wrong. That’s the size of your container.

💡 Rule 2: Simplicity is your best weapon. Complex products or strategies you don’t understand become uncontrollable monsters in crises. Start with simple, clear investments like index funds that invest broadly in global blue-chip companies. Simplicity is a sturdy pillar that holds you when you’re anxious.

💡 Rule 3: Turn off your emotional switch (feat. automation). The moment you start wondering, “Should I buy or sell now?” emotions creep in. Eliminate that gap entirely. (This is the most important. Your biggest enemy is always yourself.)

• Dollar-cost averaging: Buy the same amount on the same day every month mechanically. Stop worrying about timing.
• Automatic rebalancing: Once a year, on a set day, restore your portfolio to original proportions. You naturally sell what’s expensive and buy what’s cheap.

💡 Rule 4: Downturns are not fines but entrance fees. Change your mindset about market drops, i.e., ‘volatility.’ It’s not a penalty but a ‘cost.’ If you want returns higher than bank deposits, you must pay the rollercoaster entrance fee called volatility. Thinking of downturns as ‘fees for long-term returns’ will ease your mind.

[Key Takeaways] 📝

• Humans are emotional animals: We feel losses more painfully and are easily swayed by psychological biases. Accepting this is the start.
• Reasonableness beats perfection: A realistic strategy that your mind can comfortably maintain wins over the mathematically optimal one.
• Play a different game: Don’t fight algorithms in short-term prediction battles. Use our unique weapon, ‘time,’ and go long.
• Build psychological safeguards: Invest at a level you can sleep well, simply, automatically, and view downturns as costs.

Frequently Asked Questions ❓

Q: Is there a concrete example of a ‘reasonably rational’ portfolio? A: There’s no one answer, but Warren Buffett’s will recommends ‘90% S&P 500 index fund + 10% short-term government bonds.’ It’s a simple yet powerful strategy most people can follow without much worry. Adjusting the stock-to-bond ratio to 7:3 or 6:4 based on your temperament creates your own ‘reasonable portfolio.’

Q: Isn’t buying more during a crash the rational thing to do? A: Yes, theoretically that’s 100% correct. But actually adding money when your account is halved takes tremendous courage. The ‘reasonable’ approach doesn’t rely on willpower. Setting up automatic dollar-cost averaging will buy more for you even in moments of fear.

Trust Your Greatest Weapon

We are not robots. We feel emotions, make mistakes, and tremble in fear. Accepting that imperfection is where real investing begins.

Your strongest investment asset isn’t market insight or complex financial knowledge. It’s patience and consistency. And these only bloom on a ‘reasonably rational’ strategy that keeps your mind at ease.

Forget spreadsheet numbers for a while and find the path that comforts your heart. The noisy market will quiet down over time. If you walk your path steadily without being shaken by that noise, time will surely take you to a far better place than you imagined. I support your human, and therefore greater, investment.