The Angels and Demons of the Investor’s Mind

When it comes to investing, there may be times when we have a “gut feeling” about a certain company. It’s that tingling sensation that makes it “feel right” to invest in a company. There is a good reason why we feel that way, and it’s psychological.

Jason Zweig, the author of Your Money and Your Brain, points out that there are two major parts of our investing brain, the reflexive (or intuitive) system and the reflective (or analytical) system. In a way, it’s kinda like having the proverbial angel and demon on either shoulder as you invest.

Let’s go a little deeper – so, I introduce to you: Mr. Reflex and Mr. Reflective.  

Demons, or Mr. Reflex

First off, reflex is not entirely a horrible thing. There is a Mr. Reflex inside all of us, and we use most of the time. Further more, we need our reflexes to get through our daily lives. For instance, if your hand accidentally touches a hot pot of chinese tea, Mr. Reflex needs to kick in immediately and move your hand away. You can’t be standing there, hand on hot pot, debating and reflecting on the pros and cons of a burned hand. Mr. Reflex is also where that “gut feeling” comes from.

That said, when it comes to investing, Mr. Reflex needs to take a back seat.

Making snap judgements on investments rarely work out the way we intend it to be. Mr. Reflex is not good at imagining investing probabilities, and are more likely to be tugged one way or the next by emotions and pride instead. That’s not really how you want to make decisions on your investments.

Angels, or Mr. Reflective

Mr. Reflective, on the other hand, is more deliberative. As Zweig would put it:

While the reflective system does play a role in processing emotion, you use it largely for solving more complex problems like “is my investments portfolio sufficiently well-diversified?” or “What should I get my wife for our anniversary?”. The reflective brain can intervene when the reflexive brain encounters situations it cannot solve by itself.

Simply said, Mr. Reflective is far more useful when it comes to financial calculations, accessing company financials, and figuring out investment probabilities. This is the part of your brain you want when it comes to analyzing companies. The trick, though, is to direct Mr. Reflective to the right areas to analyze for companies, and not be bogged down by minutiae information.

Foolish take away

The Foolish investor needs to allow time for Mr. Reflective to come to the fore in investing, and not be crowded out by Mr. Reflex. Moving away from the flashing lights of daily share price movements is one way to tone down Mr. Reflex. Abstaining from future share market predictions would be another. Beating the Straits Times Index (SGX: ^STI) can be quite the challenge by itself – so, keeping Mr. Reflective on your side as much as possible might help tremendously.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.