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Snap Judgment

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Snap Judgment

When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money

FT Press,

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Are gut feelings the best way to pick a stock, a house or a racehorse? Think so? Think again. Why analysis beats instinct.

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8

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Recommendation

From CEOs to private investors, people tend to place far too much emphasis on their own instincts when making decisions, even though the results are often disastrous. Behavioral economist David E. Adler examines why people make life-altering decisions based on intuition, habit, gut feelings, urges or snap judgments instead of using analytical reasoning, a far better tool for complex decision making. In this absorbing, eminently readable book, Adler offers many fascinating case histories that demonstrate the dangers of intuitive thinking. After weighing the evidence carefully, getAbstract finds that investors, managers and other decision makers will certainly benefit from reading his report.

Summary

Think Analytically, Not Viscerally

Using intuition in decision making works against your best interests. Most people would benefit from substituting logical analysis for reliance on gut instincts. Start by objectively evaluating any mistakes you may have made due to intuition. Take money blunders, for example. People routinely project both positive and negative financial trends into the future, resulting in either irrational exuberance or unrealistic fears. Behavioral economics, which involves both finance and psychology, finds that quick judgments are clearly worthless for picking stocks. Stock purchasers need to learn more about what motivates other investors and how they are likely to act. Investing wisely is not just important on a personal basis. It also protects against the development of market bubbles that can damage the economy.

How People Decide

Prehistoric humans trusted their instincts and made snap decisions. Being able to sense the presence of a dangerous predator and flee quickly was vital. Humankind also developed the ability to decipher social cues and to distinguish friends from foes in an instant. In fact, gut reactions still can be quite...

About the Author

David E. Adler writes for Financial Planning, and has been published in The New Republic, Barron’s and Psychology Today. He is studying wealth managers’ tax awareness under a Chartered Financial Analysts Institute Research Foundation grant.

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