The myth that emotion should remain separate from investment decision-making abounds in our industry.

As humans, we have two highly developed systems: reason and emotion. And our goal should not be to divorce ourselves from emotion. Instead, we should seek to achieve balance between the two. Useful integration of the emotional and rational selves tends to be a more productive conversation—certainly a healthier approach to decision-making.

Bringing together IQ—the reason (quantitative analysis)—with EQ—the emotion (qualitative bias)—can lead to better outcomes.1 This balanced decision-making framework aims to better manage human preferences, biases and behaviors that can often undermine success.

Even more, emotional intelligence can be beneficial to the investment decision process, promoting a focus on achieving suitable risk levels and meeting long-term goals. Research also shows us that investors who incorporate their IQ and EQ may have improved investment performance.2 The key is balancing emotions and information, and being aware of where emotions may come into play.

Emotion is a force for action, if used properly. A more structured decision-making process may be key to a better investment experience for investors. Research from Herbert Simon, a 1978 Nobel Laureate in economics, is useful here. Simon showed that uncertainty about the future means that it is impossible to always make a fully informed or perfectly rational decision. This is especially true for investing. We can’t ever know for certain what the best investment choice will be, but we can choose the option that is most “satisficing.” By aiming for a decision that will “satisfy” and “suffice,” we seek the solution that is most likely to make us happy. We can use this concept of satisficing to improve the investment experience and avoid second-guessing.

Both men and women are subject to emotional influences that can have positive or negative implications for their investing habits.  These emotional influences are not predictors of success or failure as an investor—the outcome depends on many factors, including an investor’s self-awareness of their emotional influences.

For more assistance with better understanding how emotions and other biological and social factors influence the way we invest, you can access our recent guide, Tying Goals-Based Financial Planning to Asset Allocation and Investment Selection.

1John Ameriks, Tanja Wranik, and Peter Salovey, “Emotional Intelligence and Investor Behavior”, 2009.
2John Ameriks, Tanja Wranik, and Peter Salovey, “Emotional Intelligence and Investor Behavior”, 2009. and Investor Behavior,” CFA Digest 39.