The Trouble with Trusting Your Instincts

Which is the better course of action when making decisions: to go with your gut or to crunch the numbers? It’s one of those questions over which reasonable people disagree all the time. Countless books have been written on the former, as well as the latter. Some people say that you should follow your instincts and trust your own personal experience, while others insist that gathering all the data you can and approaching the decision analytically will yield a better result. So, what do we think? Well, as with most everything else in life, it all depends on the context.

Suppose you’re waiting for the bus to arrive that will take you across town to the office. A first-time commuter approaches you and asks, “Excuse me, I’ve been waiting for a while for this bus. Does it usually run late, or is it usually on time?” You happen to ride this bus every day and you’re fairly confident that it usually runs 10-20 minutes late. Although you haven’t exactly logged the bus’s arrival time every day into a spreadsheet, you do have direct, first-hand personal experience with the subject. In this case, it’s probably fairly safe to answer the other person, “Yes, it’s usually about 10-20 minutes late.”

Now suppose you have a friend that lives in another city. You see a message from them posted online that says they’re considering buying a bus pass from their city’s public transit service. Conversely, the bus schedule may be cutting it close for them to make it on time to work. Therefore, they pose the question to their online connections, “Do you think the bus will typically show up on schedule so that I can make sure I get to work on time?” In this case, you happen to know that your bus is usually late. Relying on this insight, your gut instinct is to reach out to your friend and advise against buying the pass.

The problem in taking such an action, of course, is that you’re projecting your own experience onto an experience that your friend is having. It might be better, in this case, to find out whether or not the average bus is late in the mornings or—even better—the average arrival time of the bus in your friend’s city. Either way, though, you don’t have direct, personal experience, so it would probably be better to go with the data than with your gut.

When it comes to investing, we would argue that going with your instincts is an almost surefire way to make mistakes. We all like to believe that we have some sort of special insight into the market (especially if we’re financial advisors or pundits on TV), but the truth is that we are trying to project our personal experience onto the incomprehensible complexity of the market. If we make decisions based on how we’re feeling, we’ll often end up buying high, selling low, and throwing diversification out the window.

Instinct is the great enemy of investing. In the long run, a thoughtful, measured approach will win out every time. If you need help understanding how to manage your emotions throughout the investing process and figuring out how to achieve more stability in your portfolio, feel free to reach out to us for a complimentary consultation. We want to help you feel good about your decisions, not just for today, but also for tomorrow, next week, next year, and even decades down the road when the importance of those decisions can truly be understood.

Photo Credit: Omar Roque on Unsplash