There are certain times in our lives that we knowingly or unknowingly use our intuition to decide in our lives. It could be as trivial as choosing a certain deck of cards to as big as choosing a life partner. So, is it a good idea to use our hunches in deciding the right type of investment as well? Should we make investment decisions solely based on our intuition? Let us find out.
Daniel Kahneman, a noble prize winner wrote a book in which he challenged the central idea that individuals are ‘rational’ in their thinking process. Contrary to that, he also explains that blunders are often engrained into our cognitive mind. He further explains this with a ‘two-system’ machinery of thought.
System 1 – under this system, one functions swiftly and mechanically without putting in too much or any efforts – based on emotions and instincts.
System 2 –under this system, one functions slowly, carefully, and more logically – over here one makes decisions after effortful and judicious mental activities such as complex calculations and research.
Kahneman further claims that most of the times we think through System 1 which is prone to errors and biases. On the other hand, system 2 takes over only when things get out of hand. Now coming back to the question, should we rely on our nuances to make investment decisions? Well, one usually invests in the market and picks value stocks after careful analysis and research. What if, shortly after you invest in the market, the market crashes and the value of your portfolio significantly drops? If you let your emotions have a better off you, you would instinctively want to exit the markets, which is often frowned upon by several investors. However, one does not realise that doing so will convert your notional losses into real losses. As a ground rule, if fundamentally nothing has changed, you should attempt to stay put and trust your research.
This is the reason why simple and easy models used to make investment decisions can often prove to outperform certain stock market experts that solely rely on their instincts. The underlying reason behind this could be that expert might develop ego and form biases against certain type of investment, while quantitative algorithms don’t form any biases or egos. One of the fundamental rules of investing is that to keep your emotions at bay and not let them have the best of you. This helps you avoid knee jerk reactions which could have destroyed your returns on the investment portfolio, in the first place.
Having said that, certain experts also believe that you must always hear to your inner voice – even while making investment decisions. So, what should you do? Should you give into to your inner voice or not? It’s always a good idea to create a balance. Believe in your power of instinct along with your intellectual powers. This could help you in seeing world in a way that others fail to do so. In investment world, this will help you to earn better returns than your peers who just rely on their single set of powers. You can always take the help of a financial expert or advisor who can help you invest in mutual funds and take the investment decisions on your behalf. Happy investing!