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Go with Your Gut- Should You Make Trading Decisions Based On Instinct?

You’ve all heard of the saying “Just go with what your gut says.” Or “Don’t overthink the situation.” There’s been numerous times in history where overthinking a decision ends up leading to a poor result or missed opportunity.

At the 1999 British Open golf tournament, Jean van de Velde played flawlessly throughout the tournament and approached the final hole on the last day with a 3 stroke lead. He could have afforded a double bogey and still won the tournament; a huge buffer for any professional golfer. What happened next became one of the most famous meltdowns in sports history. As van de Velde approached the tee for his first shot, it was apparent he was nervous as beads of sweat started to form on his forehead. He hit his first shot like a novice and the ball sailed 200 yards from the hole. With each following shot, van de Velde became increasingly rattled hitting the ball into high grass and then into the water. Eventually van de Velde finished the hole with a triple bogey and lost what should have been an easy chance at a major tournament win.

In the 1980s, an experiment was conducted by Consumer Reports between three random groups of taste testers. The first two groups were given different samples of strawberry jelly and asked to rate their favorite. The results were almost identical. However in the third group, tasters were asked to write down their reason for liking or disliking each jelly. The results ended up being completely different from the first two, sometimes ranking some of the previous favorites amongst the worst.

Essentially, if you think too much, you cut off your mind from your innate wisdom. So this raises the question of when do you listen to your head and when do you listen to your gut? A general rule should be: If it’s a practical activity such as playing an instrument, a fine motor skill (like driving a car or swinging a golf club), or answering a question you’ve been asked a thousand times, its best not to reflect down to the last detail. This goes against your intuitive ability to do a task.

However, with more complex decisions such as investments or trading, having a neutral and clear mind, with a well thought out strategy is invaluable. Evolution hasn’t equipped us to make these types of decisions so logic outweighs intuition. I’ve met some so called “expert traders” who dismiss using a strategy or overcomplicating their charts with numerous indicators. They swear by going on their “gut instincts” and only watch market movements. Be skeptical of anyone who tells you this. Long term successful traders and investors all have a clear set of rules or principles that guide them in their decision making.

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