Emotional Intelligence

There’s a branch of psychology dedicated to the study of emotions and how we perceive, understand, and use them in our daily lives. The concept, which originated almost jokingly by Yale professor and current dean, Peter Salovey, along with two colleagues, has garnered international media attention since the 1990s. For us as investors, “EI” as it’s known, holds important lessons.

The standard view of emotions, both as the ancients felt and as many investors feel today, is that they are maladaptive and serve little purpose. The standard advice in investing is that one should never get too “emotional” about a stock — that doing so will lead to irrational decisions, like holding when you should sell, for instance.

In many cases this may be sound advice. But I would argue that investors, rather than attempting to rid themselves of emotion entirely as some have contended, should focus on learning from the theory of emotional intelligence, which maintains that emotions serve a purpose and can be understood and used to facilitate decision making. Rather than trying to ignore emotions, investors should try to understand them in order to gain greater insight into not only their own investing psyche, but also the company’s and the market’s.

It is better for an investor to know why he or she feels some way about a stock than simply to know that he or she feels this way and that this is patently “bad”. In some cases, the emotion may be maladaptive, but in others it may be telling you something important about a company in which you’ve invested. Yet, the only way to know is not to ignore the emotions.

For instance, an investor may feel his stomach drop at a sudden price plummet or his spirits rise when an unexpected surprise leads to a spike in price. These emotions may well serve little purpose — for in most cases it will be better for the investor to remain detached from random price changes.

Yet, now imagine an investor has followed a company for some time, and the company releases a highly disappointing 10-K. It seems the business has begun faltering in earnest, and the investor is quite upset with this difficult fact. While it sounds like great advice to remain detached, the simple fact of the matter is that it may be highly difficult if not impossible to do so. On the one hand, the company is one the investor has admired for some time and feel a certain liking toward. On the other hand, the 10-K and loss of value are things that upsets the investor. Instead of ignoring the emotions, the investor would be best served by taking time to understand these conflicting emotions to help in the decision making process.

Furthermore, understanding EI can help investors in understanding customers, management, and brand image. Knowing what motivates people — what drives emotion –  can assist investors in getting a better hold on how a company is building its brand image, how management is rallying and incentivizing its human capital, and even how other investors feel about a company and why. There is no doubt that many great companies create long-lasting success by evoking strong emotions and loyalty in their customers and employees.

Anyway, this was just some food for thought as I take a break in studying for my exam in a class called — you guessed it — Emotional Intelligence. Wish me luck.