How to Use Your Heart and Head to Hack Your Personal Finance

How to Use Your Heart and Head to Hack Your Personal Finance

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You need to recognize that your desire to show people how smart you are, or to impress people with your wealth, or prove how quickly you can make money, which causes you to do insufficient research, can lead you to these bad decisions.

Accept that you are flawed, he says, and you will have a chance of doing the right thing. “Do not aim to be coldly rational when making financial decisions,” he says. “Aim to be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run.”

Mr. Housel offers two examples of reasonableness: Try to defer gratification, recognizing that wealth is created by not spending today so that you have more options in the future. And try to maintain a long horizon.

“Time is the most powerful force in investing,” he says. “It makes little things grow big and big mistakes fade away.”

As much as I like this book, it’s not perfect.

For example, Mr. Housel writes, “How you behave is more important than what you know.” While it’s certainly true that your behavior can undermine the best financial plans, it’s also true that if you know nothing about finance and make your own investment decisions anyway, you are leaving things up to chance.

I have the same problem with his claim that “an investor can be wrong half the time, and still make a fortune.” In one sense, that’s true. Here’s an interpretation that puts the comment in the best light. Say you buy 10 individual stocks that are all priced at $20 a share. If four rise 10 percent over the year, five fall 10 percent, and one increases by a factor of 20, you are a big winner.

But taking Mr. Housel’s comment literally could be dangerous. It could lead readers to believe they can beat the market by being right just half the time. That’s unlikely.

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