Nobel Laureate Daniel Kahneman posits that there are two broad neural systems that drive decision making: The analytical and the intuitive. Most often analytical judgment is deliberate and logic based as opposed to the intuitive system which is quick and feeling based. The process of arriving at investment decisions necessarily requires us to deal with risk under uncertain conditions with performance expectations and time pressure further adding to the inherent complexity. There is not an iota of doubt that the “gut” feelings of seasoned campaigners often result in huge positive pay-offs. The challenge is to integrate “messy” emotions and “soft” intuitions into a rational, linear format.
Conventional thinking suggests that investors slowly and deliberately judge potential outcomes, assigning probabilities that allow them to calculate potential gains or losses, to arrive at a well reasoned analytical conclusion. Yet, in a world where virtually all outcomes are uncertain and volatility arises from multiple interacting factors that are unexpected, the truth is that investment practice is considerably different from what theory suggests.
Demanding more information is the classical response to uncertainty. The real test is to figure out when additional information is necessary and gauging whether the information is sufficiently valuable and likely to arrive in time to make a difference. Faced with a major decision that creates significant uncertainty in your mind, one smart tactic is to get more involved by increasing your attention and focus on the specific problem. This is quite different from seeking additional data. Rather, the emphasis on monitoring the situation helps you in timing your decision better. Instead of gathering more data, you can reduce uncertainty by making assumptions about what the missing information is likely to be. In effect, you rely on your intuition to strike down the assumptions that you believe to be tenuous.
(This story appears in the 16 May, 2014 issue of Forbes India. To visit our Archives, click here.)
Mr Sanjoy is an amazing finance analyst and teacher whose articles privide in-depth knowledge and info . This particular article is intuitive decision making higlighted in the book \" BLINK \" by Malcom Gladwell .
on Sep 22, 2014Very nice article, sir! Could you educate the readers on: 1. The valuation methods you use to value stocks/businesses, through a series of posts? This would be immensely beneficial in identifying bargains and knowing when to sell. 2. What value traps are via examples? 3. Whether net-nets generate returns in Indian markets 4. Ways to screen for stocks
on May 6, 2014