What does it mean to have good intuition, or even expert-level intuition? And is it possible to develop this with investing?
The answer is yes. You can develop an intuitive sense of investing — what some would call “a gut feeling” — where your gut is trained to do the right thing, and the proper move to make simply “feels” right.
When you have this as an investor, making the correct decision comes naturally most of the time. You don’t have to force the issue or fight against yourself.
It doesn’t mean you always avoid mistakes or losses — even the greatest investors in the world make judgment errors and take losses from time to time.
But it does mean your intuition as an investor can be your ally rather than your enemy, which is a very big thing. When your intuition has been trained to steer you in the right direction, it means you can “trust your gut” and lean into it, with intuitive signals reinforcing your odds of investment success.
There is a technical term for what we are describing here. Expert-level intuition is more formally known as “recognition-primed decision making.” There is something called the recognition-primed decision model, or RPD for short.
“RPD strategy” is the study of how experts make intuitive decisions in complex situations. To call it “recognition-primed” is to acknowledge that the force behind all this is not mystery or magic, but rather rapid-fire subconscious interpretation of signals from the environment.
Expert intuition, also known as recognition-primed decision making, applies to all kinds of fields and all kinds of situations, some of them with very high stakes. One of the most famous examples is the real-world study of a firefighting crew, via cognitive researcher and intuition expert Gary Klein.
In this real-world example, the team is fighting a fire in the back of a house. The fire is small, but the flames are oddly persistent. Efforts that would normally douse the flames continue to fail. For whatever reason, the fire refuses to die out. Meanwhile the living room feels oddly warm.
The team leader is puzzled at first. Something doesn’t add up. Suddenly all his instincts scream “Danger!” He scrambles the team out of the house, and moments later the living room floor collapses.
It turns out there was a raging fire in the basement of the house. The firefighters didn’t know this, but the fire commander’s instincts picked up subtle clues that something was off. His experience told him, “this is not how fires are supposed to behave.”
When the fire commander told Gary Klein this story, he thought it was ESP, or a kind of sixth sense, that saved his men that day.
But Klein knew it was the power of recognition — the ability of the subconscious to pick up information from small cues and subtle hints, based on experience, and to take the right action as a result (getting everyone out of the house).
Daniel Kahneman, the behavioral science pioneer whose Nobel Prize-winning research helped shape our software, also talked about expert intuition in a recent interview.
Kahneman pointed out that, to develop expert intuition in a complex field, you generally need three things:
- A regular world (consistent and repeating environment)
- A body of experience (familiarity with different scenarios)
- Rapid and clear feedback (accurate performance signals)
These conditions are available to investors (with a little help from software), which is why the development of expert intuition as an investor is possible.
The stock market is a “regular world” in the sense that the same things tend to happen over and over again. The stock market never truly repeats — the future always contains a twist on the past. There are always novel combinations of new technologies, new companies rising or falling, and so on.
But at the same time, though market history does not repeat, it certainly “rhymes.” The same factors drive investor behavior year in and year out, so much so that investor behavior is roughly the same today as it was 100 years ago.
Meanwhile the same fundamental metrics have an impact on company profits, the same long-term cycles (for example high-inflation versus low-inflation periods) continue to oscillate, and so on.
This regular world allows you, as an investor, to develop a body of experience over time that maintains long-term value, because future environments will have characteristics and factors you can recognize.
You can experience different scenarios and internalize them. With the more painful and unpleasant scenarios, you can ideally observe others experiencing them and learn from a distance.
But in order to turn a body of experience into expert intuition, an investor needs clear feedback on the decisions that are made. If you don’t know whether a decision is good or bad, it is hard to develop a sense of “feel” as to whether that same decision would be right for a similar scenario in the future.
And this is where software and a disciplined investing approach, with structure and rules, truly pays off.
If someone says they have 20 years of experience in the market, but they never developed any logical rules or structured way of doing things in all that time, the 20 years of experience has not necessarily helped them. There was no method for turning market feedback into a set of logical, repeatable decisions that were refined for quality’s sake and can be made over and over again.
If you do create a set of rules and set out to improve them, however, you give your intuition something to build on. You can interact with the market and get feedback on your decisions, to determine whether they were good or bad.
If you do this consistently over time, you can develop the natural “feel” — the expert intuition — we are talking about.
We know this because we know where real intuition comes from: Interaction with a regular, repeating world, in order to develop a body of experience, with rapid and clear feedback to shape decisions.
This also explains why the tracking and analyzing capability of investment software can be so valuable.
Great software can help you analyze the current state of markets and make wise decisions in the moment. But it can also track results from the past and give you meaningful ways to learn from the data of your own investing history, which is equally important.
When you put it all together, it is possible to develop good intuition, or even expert-level intuition, as an investor. The benefits to doing this are more than just financial — they make investing a more fun and enjoyable process, in part because it literally becomes easier. (Having trained your instincts, you no longer fight or sabotage yourself.)
Software that helps shape winning behavior is a big part of this — and a big part of empowering individual investors, which is our core mission. That is why software designed to help make investors successful (not to replace them) is at the heart of what we do.
Richard Smith, Ph.D.
CEO & Founder, TradeSmith