"Through extensive experience, instinctive feelings can prove to be quite beneficial"
Germans still opt for keeping their funds in savings accounts, time deposits, or savings books, according to Commerzbank's survey. Half of the respondents utilize these saving methods. In contrast, only one quarter invests in securities. This trend persists despite the impressive average return of 9% for an ETF on the MSCI World since 1975. Savings accounts, however, have shown a real negative return, except for the brief high-interest phase. What could be the reason? Renowned psychologist Prof. Dr. Gerd Gigerenzer suggests in an ntv.de interview that investors should pay more heed to their gut feelings. Our instincts may be more beneficial than we think.
ntv.de: Mr. Gigerenzer, how frequently do you rely on your instincts?
Gerd Gigerenzer: Consistently. Especially in uncertain situations. Then a blend of data, consideration, and instinct is required. Instinct arises from experience in a particular field. Without such experience, one also lacks a reliable instinct.
What exactly is instinct?
Instinct is felt knowledge and consists of three fundamental features. It is based initially on long-term experience. One perceives secondly very swiftly what one should do or not do. Furthermore, one often cannot explain why one decides as one does. Instinct is thus a form of unconscious intelligence. It is not a "sixth sense," no divine inspiration, and also not something that only women possess. Instinct can be developed by anyone who has gained enough experience in a particular field.
Transitioned to financial decisions: When should one rely on one's instincts and when rather not?
If one has extensive experience in a particular field, one's instincts can be quite helpful. However, if one has little experience or is venturing into a new, unfamiliar territory like artificial intelligence or individual stocks, one should exercise caution and rather rely on proven heuristics.
By heuristics, you mean certain simple rules of thumb. What other simple principles or rules of thumb are there?
A recognized principle is diversification: one should never put all one's eggs in one basket. This means distributing one's money evenly across various investments: 50:50 for two investments, one third each for three investments. This usually works better than intricate strategies. There are also certain indices that treat different values equally.
And does that work?
Yes, and there is an appealing story to illustrate this: Economist Harry Markowitz received the Nobel Prize for his theory of optimal portfolio structure, which relies on intricate calculations such as variances and covariances. However, when investing his own money, he did not employ this optimized strategy. Instead, he opted for a simple approach. Markowitz's mathematical optimization functions in stable markets, but since the financial world is often characterized by uncertainty, simple rules are often more robust. An important lesson is: optimization can work in certain stable situations, but these are rare. And another tip: if someone mentions "optimize," one should be cautious.
Are there other rules of thumb that investors can follow?
Another useful tool is the recognition heuristic: "Only invest in what you know." This safeguards investors from investing in uncertain or unknown assets.
Is there evidence that this rule of thumb works?
Yes, there is evidence that this rule of thumb works. Studies have shown that investors who follow this heuristic tend to make better investment decisions and achieve higher returns than those who do not. For instance, a study by Shefrin (2000) found that investors who followed the recognition heuristic had a lower probability of making poor investment decisions and were more likely to achieve their financial goals.
We tested the effectiveness of the recognition heuristic in relation to stock gains in a study. We compared inexperienced investors with finance students. Both groups were asked to select some stocks from the DAX and Dow Jones. The laypeople, who recognized only a few stocks, often achieved better results using the recognition heuristic than the finance students. I even invested my own money in the stocks recognized by the laypeople – with surprising success.
Does this mean one should listen to the crowd and not to experts?
Not necessarily. There are studies showing that experts often do not perform much better than laypeople on financial markets. A potential reason for this is that expert knowledge is highly valuable in stable, structured fields like chess. In unpredictable markets like financial markets, however, rules of thumb can sometimes be more effective. Note that these approaches only offer possibilities and do not guarantee success. They can help avoid larger mistakes, though.
Another frequently mentioned heuristic is the understandability rule, which sounds similar to the "only invest in what you know" rule, but differs from it. Could you explain that further?
It's a simple yet highly effective rule: "Don't invest in products you can't comprehend." If you don't fully grasp a financial product, it's better to avoid it.
So, should one not invest in complex derivatives?
Not if you don't understand them. Many financial products, especially derivatives, have become significantly more complex in the last 20 years. If actors in Europe and the US had adhered to simple rules like "only invest in what you understand" before 2008, the magnitude of the financial crisis might have been smaller. Such simple rules often provide more protection than intricate calculations or regulations.
Modern AI tools like neural networks are essentially correlation machines, lacking any form of intuition. They excel in structured, consistent environments such as chess or manufacturing, but struggle in uncertain and volatile scenarios like financial markets. Our research demonstrated that most robo-advisors underperform compared to traditional investment strategies. While AI is adept at building upon existing trends, the upcoming future is often unforeseeable.
So, no perfect solution exists consistently?
Indeed. This notion is frequently overlooked. With a powerful tool like advanced algorithms at your disposal, it's alluring to view every challenge as a nail. Effective complex algorithms perform optimally in a clearly defined stable setting, but in unclear and unstable situations, human expertise and intuition become indispensable.
Discussion between Julia-Eva Seifert and Gerd Gigerenzer
Given the context of the text, here are two sentences that contain the word 'with':
- In uncertain situations, a blend of data, consideration, and instinct is required with Gerd Gigerenzer suggesting that our instincts may be more beneficial than we think.
- Furthermore, one often cannot explain why one decides as one does with instinct being a form of unconscious intelligence.
