Sometimes the best financial decisions aren’t always the most logical ones
While reading about Harry Markowitz, the economist who won a Nobel Prize for explaining the tradeoff between risk and return, I came across something fascinating. Markowitz mathematically proved how investors should build portfolios. He gave the world the formula for optimal diversification. But when asked how he invested his own money, his answer was human.
In the 1950s, when a journalist asked Markowitz about his own retirement strategy, he admitted something surprising. He said he did not use his own complex formula for calculating the “efficient frontier,” because he was worried about how he might feel emotionally depending on how the market behaved. If he wasn’t invested and the market went up, he felt bad. And if he was invested and the market went down, he felt bad again. So he went with simple diversification of 50/50 for his portfolio.
Also read: Why is Retirement considered to be the Most Important Goal?
Even the man who built the theory of rational investing couldn’t escape emotion.
That made me pause.
We often think rational investing means removing emotion completely, optimizing mathematically, following data, maximizing returns. But investing doesn’t happen inside formulas. It happens inside people.
For a long time, I too believed that being rational was the smartest way to approach money. That belief stayed with me until I read The Psychology of Money by Morgan Housel, a highly recommended book on personal finance.
In one chapter, he shared a very simple but a bit uncomfortable idea. We often believe that if something is logically correct, it should work for everyone. If the numbers are strong, if the projections are clear, if the math supports it, then the decision must be obvious. But real life doesn’t always work like that.
Something that feels perfectly rational to one person may feel overwhelming to another. The chapter isn’t about different preferences being rational. It’s about something that can be mathematically optimal, but emotionally unbearable. And something slightly less optimal, yet more sustainable. That’s the heart of it. It is called being Reasonable—the midway between being Rational or Emotional.
Also read: Why Chasing High Returns Often Hurts Investors
Rationality asks: “What is mathematically optimal?” Reasonability asks: “What can I live with?”
And as Morgan Housel puts it, something can be technically true but contextually nonsensical.
Markowitz is neither irrational nor perfectly rational. He was reasonable, by not following his own theory 🙂 And maybe that’s the most honest any of us can be.
Reasonability in Career choices – May be a Probability Strategy
If I tell someone simply, “Do what you love,” most people would smirk and dismiss it immediately. It sounds like something off a motivational poster. The common response is practical: “That sounds nice, but I can’t earn a living doing what I love.”
But what if we looked at this through a slightly different lens- a quantifiable one? Every career, every business, every investment operates under some probability of success and failure. If the odds are uncertain anyway, choosing a path that aligns with what you genuinely enjoy may not be as irrational as it first appears. When you enjoy what you do, the probability of persistence, learning, and long-term commitment increases and that quietly improves your chances of success.
Seen this way, the advice stops sounding like a fortune cookie and starts looking like a probability strategy. This is why, in financial decisions, I often feel that being reasonable can sometimes be more useful than trying to be perfectly rational.
Familiarity may also be Reasonable
Take the idea of home bias in investing. In theory, a perfectly rational investor would diversify globally. After all, your home country represents only a small fraction of the world’s opportunities. Limiting yourself to your domestic market means ignoring a large part of the global economy.
Yet many investors naturally prefer investing in companies and markets they are familiar with. It feels safer. It feels understandable. There is comfort in knowing the environment where your money is being invested. Strictly speaking, that may not always be the most optimal decision on paper. But familiarity does something powerful: it gives you the confidence to stay invested. And sometimes that confidence matters more than theoretical perfection.
But reasonability comes from weighing all the options and not just familiarity which may be making you emotional towards your decisions. Like when you invest in LIC policies not just because it suits your goals but your father did this for you and you know the uncle (LIC agent) for a very long time, or when you prefer bank FDs over equities because you don’t want to discuss your goals with a financial planner and Bank FDs are safe and Familiar, it may not be a good choice for you.
Also read: How to choose the Best Financial and Investment Advisor in India
A small example of familiar investing played out recently. Sheetal was talking to her mother about her new business, which had just started growing. She casually asked if her mother would like to invest a small share in it. Her mother agreed almost immediately not because she had run financial projections or calculated expected returns, but because the investment felt familiar. It was her daughter’s work, something she could understand, something she believed in.
But here’s what makes this more than just an emotional story. Sheetal’s mother wasn’t acting on blind sentiment. She had spent years building a well-diversified portfolio, which will take care of her post retirement income very comfortably. Her financial foundation was solid. The investment in Sheetal’s business? That came from the surplus portion of her portfolio she could afford to put toward something with higher risk and higher potential.
This is where familiarity and reasonability meet. The emotional pull was real- of course, it was her daughter. But the decision wasn’t reckless because of it. It was reasonable precisely because her position allowed for it. If Sheetal’s business grows, both of them benefit. If it takes time to find its footing, her mother’s financial life remains completely intact. The familiarity gave her the confidence to say yes. The portfolio gave her the freedom to do so without it costing her security.
That intersection, where emotional familiarity is backed by financial groundedness, is what separates a reasonable decision from a risky one dressed up as love. And this is something I’ve seen play out repeatedly in the conversations I’ve had with clients.
What Risk Profiling Actually Taught Me
At our Financial Planning firm, Good Moneying Wealth Planners Pvt Ltd, risk profiling is one of the first things we do with every client. On paper, it seems straightforward a set of questions designed to quantify a client’s appetite for risk and match them to the right financial products. Aggressive investor? Equities. Moderate? A balanced mix. Conservative? Fixed income. Clean, logical, rational.
But the more clients I’ve sat across from, the more I’ve realized that risk profiling is less a science and more an art. The questionnaire tells you what a client might be comfortable with. The conversation tells you what they actually are.
I remember one particular client, let’s call him Kabir. A mid-40s professional, stable income, long investment horizon. On every objective metric, he was a candidate for a high-equity portfolio. The numbers said aggressive. His profile said aggressive. But when we started talking about market volatility and the possibility of seeing his portfolio drop 20% in a bad year- even temporarily, something shifted in the room. He didn’t panic, but he was clearly uncomfortable. He kept circling back to one question: “But what if I need this money?”
That question told me everything I needed to know. Kabir wasn’t irrational. He was reasonable. He had a family, responsibilities, and a lived experience of financial uncertainty that no questionnaire could fully capture. Putting him in a pure equity portfolio would have been technically correct. But it wouldn’t have been right for him.
We arrived at a blended approach, not the most aggressive option. Not the most optimal on a return-maximization spreadsheet. But something he could sleep at night with. Something he would actually stay committed to when markets turned rough, and they always do at some point.
Also read: What is a Good return on your Investment?
That, to me, is the whole point. A portfolio Kabir sticks with through a market correction will outperform the “ideal” portfolio he panics and exits at the first downturn
Conclusion – What’s in it for you? The Strategy You Can Live With
Rationality tries to build the perfect portfolio on paper. Reasonability builds a portfolio that a real person can live with for decades.
Money decisions are rarely made in a vacuum of logic. They exist at the intersection of numbers, emotions, familiarity, and trust. And the more time I spend in this field, the more I believe that a financial advisor’s job isn’t to find the best solution; it’s to find the optimal solution for this specific person, in this specific life, with this specific relationship to money.
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Markowitz split his money equally because it felt balanced. Kabir chose a mixed portfolio because it let him sleep. Sheetal’s mother invested in her daughter’s business because her portfolio gave her the freedom to, and her heart gave her the reason to.
None of these are irrational decisions. They’re deeply reasonable ones.
And in investing, the strategy you can stick with will always beat the one that only works in theory.
Credit: Ms. Sudhiti Kanungo, Financial Planning Intern, Good Moneying
