Understanding how we make decisions is critical as it helps us make better investments. For example, whether we rely more on analysis or intuition significantly impacts our decisions.
In general, there are two ways people think.
Some make almost instant decisions fueled by their experience, previous knowledge, and instinct. The other group of people focuses on logic and careful deliberation. In other words, whether we’re working with systematic funds or discretionary funds, our decision-making is based on one of these two models.
Even if you’re using a momentum investing approach, it doesn’t mean that your intuition is not involved.
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Intuitive thinking
Everyone has done things intuitively. Experienced drivers don’t think about gas pedals, brakes, steering wheel, or gears when they drive. We also don’t think much about making coffee, opening a bottle, or any other repetitive task we’ve done many times.
These actions don’t require strategic thinking, and it’s all about memory and experience doing the work. The thought process behind these operations is short, automatic, and intuitive. Everyone uses this thinking system for answering simple questions.
The approach has downsides, though. It’s impulsive and looks only at familiar factors without thinking about the unknowns. It’s also prone to errors and biases, as investors rely on their experience and presume things instead of checking the facts.
Analytical thinking
Analytical thinking is slower, cautious, systematic, and more rational than intuitive thinking. This approach is generally used for complex actions. If intuitive thinking lets you drive, analytical thinking enables you to park your car in a tight space. It’s about being conscious and creating an image of our actions and consequences.
Solving problems this way requires a lot more time and effort, and not everyone has the capacity to execute them. This approach can be instrumental as far as systematic funds and investing are concerned. However, this system can be really exhausting and also lead to errors.
The longer the process is, the more energy is required for analytical thinking. Many people don’t have the patience and persistence necessary to use analytical thinking to the end. So, which system is actually better to use in investing?
Combining intuitive and analytical thinking
Every professional investor working with systematic funds or any other kind of investment should be using the analytical approach, right? You might be surprised to learn that intuitive thinking is in charge most of the time.
The speed and flexibility it offers are what make it the preferred choice. Analytical thinking comes into play when problems happen eventually. It supports the dominant approach, tracks all the actions, monitors progress, changes behaviors, and modifies conclusions.
The second system is there to override the first system and “put a leash” on it, but that’s not possible in some cases. Being too emotional can make it challenging to look at things analytically, especially if you’re tired.
Using these approaches for investing
The first approach is excellent for finding complex patterns, finishing repetitive tasks, and judging simple investment opportunities. However, it works poorly when processing brand new information and is full of biases. Sadly, lots of us turn to this way of thinking and end up with poor investment decisions.
When making decisions about highly complex systems like investments, you can’t rely on your first impulse. Of course, an asset might “feel” similar to some other you’ve done in the past, but you absolutely need to focus on facts.
Don’t go into an emotional overload
All investors are exposed to news, projections, and market volatility that can affect them emotionally. That’s not a problem unless you rely too much on your emotional thinking. For example, checking the current market fluctuations can be helpful, but it’s generally not good to look at the numbers every day.
When you look at small losses each day, you can get highly discouraged about your investment and make changes wholly based on emotion. On the other hand, you wouldn’t get an equal emotional pleasure of seeing small earnings each day, so there’s no sense in doing this.
The goal is to look at your long-term goals and check the numbers at different milestones.
Beware of growing overconfident
Many investors recognize patterns from previous investments and think that the market cycles will behave similarly in their new acquisitions. We don’t have a 100% reliable memory of the past, but many different factors can change how an investment behaves in the future.
If we could prejudice the future using a limited number of factors, everyone would always make profits on their investments. Just because you understand and know a specific type of investment doesn’t mean you should get carried away and become blinded to all the other factors involved.
Conclusion
Investors often think of themselves as computers or machines, but they’re not. Like anyone else, you are a human being, and this means that your emotions, subjective opinions, and biases play a significant role. These things aren’t necessarily bad, but you need to learn how to use them to your advantage.
We hope this post has helped you understand a bit more about this topic. Take the time to analyze your actions and see where you could use a bit more intuition or where you should be more analytical.