Whether you’re investing, buying or saving, you may have strong intuitions about the best time to act. But can you follow your instincts or will gut feelings lead you astray? Our aim here is not to say whether intuition is good or bad. Instead, we’ll help you identify the right time and place to use it and the cases where it’s better to reach out to an expert in finance.
Intuition is always a touchy subject. It can be difficult to tell when you should trust your gut and when it’s leading you astray. In this article, myLIFE will help you know when to trust your intuition and when you need to rely on expert advice to avoid making serious mistakes with your money.
Intuition or the illusion of knowledge?
Intuition is easy to recognise and yet surprisingly hard to describe. Many of us are in tune with our own intuitions and admire people who confidently rely on their “instincts” to get through tricky situations.
Intuition is the ability to gain direct knowledge or insight, apparently without the intrusion of rational thought or logical inference.
A product of our subconscious, intuition is a flash of insight that we couldn’t have obtained from any other source. We experience intuition as strong emotions, perceptions and instincts that seem to give us a whole new outlook or understanding of the world around us. In short, intuition is the ability to gain direct knowledge or insight, apparently without the intrusion of rational thought or logical inference. But that doesn’t mean that intuition is totally irrational or that it should be dismissed out of hand. It’s absolutely fine to trust expert intuition, so long as we don’t confuse it with the illusion of knowledge.
In a special feature on behavioural finance, myLIFE described how cognitive bias can result in irrational thought patterns that cloud our judgement without us realising. As we noted, cognitive bias comes in an impressive array of forms. What we take for intuition could, for example, be a mixture of overconfidence and confirmation bias, which involves only considering information that confirms our existing opinions and value system.
You might be so determined to be right about how to invest your savings that, without even realising it, you only consider information that confirms what you thought before in order to build a simple narrative that your brain can absorb without effort. The upshot of this is that you substitute the complex reality of investing with an utterly biased mental illusion that backs up the decisions you had already made.
What we think of as valuable intuition could in fact just be the result of impulses, prejudices, illusions and the influence of factors from our immediate surroundings. How can we tell the difference? The only way is to force ourselves to scrutinise the sense of certainty that comes with our intuition. We have to learn to sort through these emotions as effectively as possible to overcome any cognitive illusion that might harm our decision-making process.
Reliable expert intuition definitely exists, but it only emerges when certain conditions are met.
Intuitive expertise gained through experience
We have all heard about times when expert intuition made all the difference. That trader who followed his gut and adopted a winning position on the market. That surgeon who, in the middle of an operation, took a split-second decision to follow one procedure rather than another and saved the life of the patient. These cases demonstrate that reliable expert intuition definitely exists, but it only emerges when certain conditions are met.
First and foremost, our split-second judgements are more likely to be reliable in areas in which we have achieved a degree of expertise. Let’s not be under any illusion: experts acquire intuitive skills by drawing on the years of experience and practice stored in their brain. Even if they couldn’t spell out an exact formula, an expert knows how to recognise a situation with a predictable outcome and a stable structure they’ve come across in the past. In such circumstances, there is every reason to trust their professional instincts.
Conversely, when the situation is unpredictable and unprecedented, for example when the financial markets are in turmoil due to exceptional circumstances, even “expert” intuition has its limits. A financial expert capable of humility knows that, rather than trusting their instinct alone, it’s important to be cautious and calmly analyse all of the information at their disposal before making a decision. Even a seasoned investor who is an expert in their field should be particularly vigilant when the situation on the markets becomes unpredictable and there is a risk of substantial capital losses.
As such, intuition is not to be confused with some sort of prophesy or the Coué method, which supposedly favours positive future outcomes. If you’ve made several bad investments in the past by investing off your own bat in a given type of financial product, imagining that your luck has changed this time is not intuition, it is a dangerous illusion. As Albert Einstein is supposed to have said: “Insanity is doing the same thing over and over and expecting different results.” In this situation, you should reach out to your banker as a matter of urgency rather than digging your heels in.
Our expert judgements are also more reliable when our emotions don’t get the upper hand. Situations that trigger strong emotions are dangerous. That’s why surgeons never operate on members of their family: they know that their emotions will get in the way, clouding their judgement and making them less effective. The same can also be true when we invest our own money, especially when the markets are particularly volatile.
Just as a surgeon would let a colleague operate on their loved one, your money will be safer in the hands of a financial expert with a more detached viewpoint. They (unlike you) will be able to keep a cool head and you will reap the rewards of their expertise and rational decision-making.
Listening to your intuition is important, but it shouldn’t be taken at face value. A snap judgement should be a starting point for broader reflection drawing on other opinions and information so that you can assess its validity in a given context. There is no shame in acknowledging that you lack experience or expertise in a field.
Even the expertise of your banker has its limits. They may know everything there is to know about the product ranges on offer and the various investment strategies, but they are not an expert in life trajectories. And they certainly aren’t an expert in your life! Draw on their financial expertise, but be very clear about your own ambitions and life choices to move towards your best possible future. Everyone has their own path.
Beef up your intuition
Why not become an expert on yourself? Don’t just sit there twiddling your thumbs waiting for a flash of inspiration. Tap into your intuitive intelligence so that you arrive at your meeting with your banker with a clear sense of your choices and aspirations. Intuition takes work but it’s a muscle you can train. It’s up to you to listen to your gut as you consider the various options on offer and put your beliefs and convictions through their paces. To test the strength of your intuition, force yourself to pay particularly close attention to information that runs counter to it. Here’s a little exercise to try.
Step 1: think of a situation in which you relied on your intuition and it worked out well. What were the circumstances? What happened and what was the outcome? Do you know what factors prompted you to follow your intuition? Describe them.
Step 2: think of a situation in which you relied on your intuition and it didn’t work out well. What were the circumstances? What happened and what was the outcome? Do you know what factors prompted you to follow your intuition? Describe them.
Step 3: draw conclusions about your personal convictions, as well as any areas and circumstances in which you can trust your intuition.
Once you’ve done so, you’re ready for a conversation with your banker. But remember: they’re the financial expert, but you’re the expert on your life trajectory. When you’re looking for guidance, the best question to ask is not “What should I do?” but “How can I achieve this goal?” based on your situation and values. This information forms an integral part of your investor profile and your banker will use it to steer your conversation. Your investor profile reflects your knowledge and experience, ability to bear losses, investment objectives and level of understanding of the markets. Make sure that you share your precise objectives, the personal values that underpin them and any possible compromises in order to minimise your level of risk based on your profile.
Whatever happens, never lose sight of the fact that you have the final say. Only your intuition will tell you if your choices are in line with your core values. Feeling at peace with an upcoming decision is always a positive.