Reasonable Money Decision Test
Choose the financially sound option you can live with, not the perfect spreadsheet.
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 4
- Confidence
- 98%
The Reasonable Money Decision Test adds human behavior and quality of life to a conventional financial calculation. First establish what the spreadsheet favors, then ask whether the person can live with that option during stress and whether it supports the life the money is meant to improve. A choice can be mathematically inferior yet behaviorally superior if it creates security, prevents panic, or makes a long-term plan easier to sustain. Housel uses paying off his mortgage as the clearest example: he calls it a poor financial decision on paper but his best money decision because of the independence and security it created. The model remains personal; another person may experience the same choice as intolerable lost opportunity.
Origin
Morgan Housel described owning his home without a mortgage as his worst financial decision but his best money decision.
Core principles
- 01A mathematically optimal decision can fail in real life.
- 02Behavior and peace of mind are legitimate financial inputs.
- 03The best decision can differ between equally informed people.
- 04Capital should support a better life, not only a better spreadsheet.
How to run it
- 1
Run the numbers
Identify the financially optimal option and the cost of departing from it.
Pro tip Keep the calculation honest even when you expect to choose differently.
Watch out Reasonableness is not permission to hide the tradeoff.
- 2
Measure lived effects
Assess how each option changes security, autonomy, sleep, and likely behavior.
Pro tip Include the value of avoiding a panic-driven future decision.
Watch out Do not assume everyone shares the same emotional response.
- 3
Check sustainability
Choose an option you can continue through realistic periods of uncertainty.
Watch out A rational plan abandoned under stress is not rational in practice.
- 4
Own the preference
State why the chosen tradeoff improves your life without claiming it is universally correct.
Pro tip Describe it as a personal money decision rather than general financial advice.
In the wild
Housel and his wife chose to own their house without a mortgage even though he says the choice cannot be justified on a spreadsheet. The resulting independence and security, especially while raising children, gave them more pleasure than other uses of their money.
→ A mathematically inferior choice became a sustainable quality-of-life decision.
Common mistakes
Treating the spreadsheet as the person
The model cannot capture whether fear or discomfort will cause someone to abandon the plan.
Universalizing your comfort
A decision that creates peace for one person may feel wasteful and distressing to another.
Is it for you?
Best for
It is best for personal financial choices where emotional security materially changes long-term behavior.
Not ideal for
It is not ideal for justifying choices that create insolvency or transfer unacceptable risk to others.
From the transcript
“there are a lot of things that investors do that are not rational but I think they're perfectly reasonable”
“my wife and I don't have a mortgage on our house which is the worst financial decision we've ever made”
“it's been the best money decision that we've ever made”
From the episode
#576: Morgan Housel — The Psychology of Money, Picking the Right Game, and the $6 Million Janitor
Morgan Housel