Interesting. Sure would take a lot less time than doing financial research. I wonder why this works.
Q: You are the author of a famous study on how people use instinct in investing. Why this topic?
A: Because intuition often underlies stock picking. Ordinary investors will frequently pick a company they’ve heard of before. We call this the “recognition heuristic,” and it basically means “go with what you know.” I was curious: is this effective? In the 1990s, we interviewed 360 pedestrians in Chicago and Munich. We asked if they were familiar with the names of German and American corporations traded on the stock exchange. Using the names of the most frequently recognized companies, we then made up investment portfolios.
After six months, the high-recognition portfolios, on average, gained more value than the Dow and DAX markets and some big-name mutual funds. The high-recognition portfolios did better than a portfolio we created from randomly picked stocks and another made up of low-recognition stocks. Over the years, we’ve repeated this experiment twice, in different ways. Each time, the intuitive wisdom of the semi-ignorant outperformed the calculations of the experts.