Updated on 12.19.11

Personal Finance and Intuition

Trent Hamm

A few weeks ago, I was exchanging emails with a reader (who asked not to be quoted, but said I could paraphrase the conversation). She told me that she makes most of her decisions entirely on instinct and intuition and feels that this is why she often gets into financial trouble.

Frankly, I agree with her conclusion. You can most certainly get into a lot of financial trouble if you operate entirely on intuition, instinct, and impulse.

When you’re shopping, if you make a purchase based on instinct without running the numbers, you’re probably wasting significant money.

When you’re investing, if you rely on a gut feeling for your investment choices, you’re probably going to lose money on that investment compared to what you could have made.

When you’re planning for the future, relying on intuition often means that you find it really difficult to set a goal and follow a plan to get there.

I speak from experience in each of these cases. I’ve found that, time and time again, your gut reaction can lead you down a very dangerous money path. Yes, sometimes it can result in good things, but the number of mediocre and poor things that can result from intuition overshadows this.

What can you do about it, though? It is often too tall of an order to simply tell someone to stop relying on their gut when they make decisions. You can’t completely alter how people think and how they make decisions.

Instead, what you can do is alter the basis upon which they make those decisions.

If you spend some time researching the products you buy in advance until you know about them and know how to evaluate their prices and relative quality, you’ll naturally incorporate that into your shopping decision.

If you spend some time researching various investments and understanding what the various risks and benefits are of different options, you’ll naturally incorporate that information into your investment decisions.

If you spend some time carefully planning for goals and setting up a very clear plan to get there that is obvious and clear to follow along the way, you’ll use that when making all kinds of time and money decisions along the way.

The key is preparation. If there is one real key to success in almost any area, it’s the preparation you put into it. The more you understand the options before you, the more likely it is that you’ll make a good decision when you’re faced with a choice. That decision will probably still be based on intuition, but that intuition is a flower grown from a rich topsoil of knowledge.

When you’re not pressed for a decision, spend some time investigating the decisions you make every day – or the big ones you know you’re going to be making soon.

Look up the products you regularly buy on the internet. Figure out where the least expensive place is to buy them, and compare the products to competitors. That way, you can make a better decision about not only which specific product to buy, but where to buy it.

Read a well-rounded book or two on investing topics, and take the time to actually understand what is being said in them. Take it slow, and look up terms you don’t know on the internet.

Plan out what you want from your future, then think about what you’ll specifically need to do to get there. What can you be doing each and every day to make that future come true?

For me, I find that the more I think about such things and the more I learn, the better my intuition and instinct becomes. They draw on the foundation of knowledge that I have and the time that I’ve invested thinking about these issues.

Simply put, learning and thinking helps your finances.

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  1. T'Pol says:

    I agree Trent. Without a foundation of knowledge, instinct, gut feeling, intuition, whatever you call it, is mere gamble and impulse.

  2. Geoff Hart says:

    Precisely. There’s a pernicious myth that our subconscious is somehow wiser than our conscious mind, and that we should always trust it. That’s true in a very limited set of circumstances, and purchasing decisions isn’t one of them.

    Highly trained professionals are a different story. Many of them have internalized the many factors required to support a decision so well that they apply those factors quickly and without consciously enumerating each factor. That seems to be what most people call “instinct”, but it’s not. It’s the result of years of practice running through a list of decision factors on their way to making a decision. In that case, instinct is actually a very sophisticated assessment of the facts, not a “hunch”. Anyone can achieve that level of skill, but it requires work; it doesn’t happen by itself.

    There’s also a pernicious myth that people who think things through are somehow cold and calculating. They can be. But learning to think in no way means forgetting how to feel. We need both in our life, and in my experience, it’s the thinking part that’s more often in short supply.

  3. getagrip says:

    I have a friend who bases all decisions on “intuition” without a whole lot of thought. He leads the kind of life that sounds interesting when you only consider the high points he tells stories about. But as his friend whose gotten a lot of late night phone calls, I can say with confidence that his intuition has lead to a lot more failures, complications, and low points sprinkled with those few high points he uses for his tales.

    I agree with some of the other commenters above, when you’ve experienced something many times or studied it for a while, then “intution” can help in seeing a real opportunity or making a determination between options. Otherwise you’re just guessing.

  4. Cindy Brick says:

    Why not use both intuition AND research? If your ‘gut’ tells you that a certain stock is a bargain, for example, and research bears that out, I see no reason NOT to buy it.
    Similarly, if it seems as high as it’s going, and you have a sense that it’s going to drop some (and you had no plans to hold it long-term)…why not sell it?
    I am a firm believer in intuition — especially our God-given sense that something is wrong, though we can’t figure it out yet. In nearly every case, when I felt a person, purchase or opportunity was ‘wrong’ (generally too good to be true) — it was. Your post almost suggests that you shouldn’t use intuition at all. I believe we should, as long as we also apply what my uncle called “common ordinary everyday horse sense.” (He would then bray like a donkey after that — because I usually didn’t apply it!)

  5. AnnJo says:

    @4, Cindy Brick, if I let my “gut” have anything to say about what stocks I buy, then my research is going to be seriously compromised by confirmation bias. I told my “gut” to shut up about such things a long time ago, and if it pipes up when not asked and won’t be quiet, I walk away from the purchase, regardless of what my “gut” says.

    You say that “in nearly every case” your intuition was right. See, that’s what I mean. There’s absolutely no way you (or anyone) could know that. If your intuition told you a purchase was wrong and you made the purchase anyway, you simply would have forgotten what your intuition told you, whereas if you walked away from a purchase based on your intuition, there’s little chance you could extrapolate whether a purchase would have really been wrong, since you didn’t make it, and if its wrongness was discernable, chances are good your conviction that your intuition guided you is self-deceptive.

    There are some great books out today on the tricks our minds and emotions play on us in any effort to reach wise decisions. Trusting in our “intuition” is certainly one of the big ones.

  6. Fabrizio says:

    Go definitely intuition and istinct!
    Avoid impulse!
    It’s all there, and when you start talking about preparation in one way you are avoiding impulse.
    Don’t trust rationality (too much I mean), cause it’s represents only the “surface elaboration engine”: the real one in the deepest interconnections of our brain.

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