As an economist, reading more psychology on decision-making has been a very mind-opening experience. Psychology has spent more time and energy researching issues associated with thinking, decision-making, and biases and provides alternative model foundations relative to finance and economic researchers who have focused on behavioral biases. There are great researchers in behavioral economics; however, there just is more work in psychology on how people think and why they choose different decisions. At the very least, there is less focus on finding biases and anomalies from rational utility maximization and more focus just on understanding thought processes.
Reading some of the work of Jonathan Haidt, the moral psychologist, there arose a phrase that is helpful for all explaining all decision-making problems. It could easily be a mantra that drives investor thinking.
"Intuition first, strategic reasoning second"
Psychologists often use the metaphor of an elephant and rider to describe our thinking. Our intuition is the elephant which has to be steered by the rider, our rational thinking. Behavioral economists and finance-types have been influenced by the fast and slow thinking metaphor of Kahneman, but the lumbering strength of our intuition is often a driver that has to be managed by our strategic reasoning. However, the dichotomy of emotions or intuition versus reasoning has been a more universal problem than one of psychology or economics.
The mantra of "intuition first, strategic reasoning second" also has a long history in philosophy. We can go back to Plato who thought about reasoning as a charioteer who controlled the horses of emotion and reason. From Phaedrus, "First of all we must make it plain that the ruling power in us men drives a pair of horses, and next that one of these horses is fine and good and of noble stock, and the other opposite in every way. So in our case, the task of the charioteer is necessarily a difficult and unpleasant business." Learning and reasoning will strengthen the reins provider greater grip on emotions. The fight between reasoning and hot emotions is long-standing, but Plato offered a solution. Get smart, albeit this is easier said than practiced.
David Hume, the great Scottish philosopher of the Enlightenment had a different view and suggested that reason is the slave of passion. "Reason is, and ought only to be the slave of the passions, and can never pretend to any other office than to serve and obey them." His view is the the direct opposite of the classical view. Emotions drive our reason. The Hume view can be viewed as the foundation of behavioral finance. Emotions are justified not overruled. We look for arguments to support our gut and not for reasons that conflict with our feelings.
Behavioral finance research is an attempt to understand which force is dominant, emotions or reason. The focus of good investing is trying to ensure that reasoning is in control of emotions while appreciating that emotions will still drive the reasoning for many market players. We may like for markets to be rational but sometimes emotions are in charge. Reasoning first and intuition second is rational but it does not allow for the complexity of market behavior.
"Intuition first, strategic reasoning second"
Psychologists often use the metaphor of an elephant and rider to describe our thinking. Our intuition is the elephant which has to be steered by the rider, our rational thinking. Behavioral economists and finance-types have been influenced by the fast and slow thinking metaphor of Kahneman, but the lumbering strength of our intuition is often a driver that has to be managed by our strategic reasoning. However, the dichotomy of emotions or intuition versus reasoning has been a more universal problem than one of psychology or economics.
The mantra of "intuition first, strategic reasoning second" also has a long history in philosophy. We can go back to Plato who thought about reasoning as a charioteer who controlled the horses of emotion and reason. From Phaedrus, "First of all we must make it plain that the ruling power in us men drives a pair of horses, and next that one of these horses is fine and good and of noble stock, and the other opposite in every way. So in our case, the task of the charioteer is necessarily a difficult and unpleasant business." Learning and reasoning will strengthen the reins provider greater grip on emotions. The fight between reasoning and hot emotions is long-standing, but Plato offered a solution. Get smart, albeit this is easier said than practiced.
David Hume, the great Scottish philosopher of the Enlightenment had a different view and suggested that reason is the slave of passion. "Reason is, and ought only to be the slave of the passions, and can never pretend to any other office than to serve and obey them." His view is the the direct opposite of the classical view. Emotions drive our reason. The Hume view can be viewed as the foundation of behavioral finance. Emotions are justified not overruled. We look for arguments to support our gut and not for reasons that conflict with our feelings.
Behavioral finance research is an attempt to understand which force is dominant, emotions or reason. The focus of good investing is trying to ensure that reasoning is in control of emotions while appreciating that emotions will still drive the reasoning for many market players. We may like for markets to be rational but sometimes emotions are in charge. Reasoning first and intuition second is rational but it does not allow for the complexity of market behavior.
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