Gut feelings matter far less in investing than a set of hard-and-fast rules


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

Much as the tabloids love a good health-scare story to run on their front pages, the Financial Times rarely seems able to resist a new piece of research on behavioural – or, in this instance, physiological – finance. And so it was that the story Man v machine: ‘Gut feelings’ key to financial trading success duly featured in a prominent position in the paper.

Over the years, here on The Value Perspective, we have learned it is well worth taking a leisurely look at the assumptions used in whatever research inspires such articles. That said – given ‘gut feelings’ are about as far removed from how we invest as it is possible to get – there was nothing leisurely about the way we downloaded and devoured Interoceptive ability predicts survival on a London trading floor.

Interoception, the study tells us, is “the sensing of physiological signals originating inside the body, such as hunger, pain and heart rate” while “people with greater sensitivity to interoceptive signals, as measured by, for example, tests of heart-beat detection, perform better in laboratory studies of risky decision-making”. It goes on to assert: “Signals from the body – the gut feelings of financial lore – contribute to success in the markets.”

So – can you sense the beat of your heart? If you were wired up to a monitor and asked to say how many times your heart beat over a period of time, how close would you be to the machine’s tally? Alternatively, would you be able to say whether your heart was beating in time to a piece of music or was slightly off? Both tests were used in the report and, if you believe you could satisfy them, you should apply for a trading job right now.                                              

On second thoughts, perhaps you should read the rest of our article first. We are not about to deny greater interoceptive ability helps you take better risk-taking decisions – maybe it does and maybe it doesn’t. What we would suggest though is this particular study, which analysed the decisions of 18 traders over 12 months towards the end of the European sovereign debt crisis, offers little in the way of real evidence in either direction.

For starters, 18 subjects is a very small sample and 12 months a very short period of time for any sort of rigorous analysis. Nevertheless, the researchers looked at each trader’s profit and loss account, compared it with their ability to judge their own heart rate and essentially concluded that, the better you are at knowing what is going on inside your own body, the better you will be at using your gut instinct to make a trading profit.

As we implied earlier, here on The Value Perspective, we believe gut instinct is generally a pretty poor way to make a trading profit but, to be fair to the researchers, they do acknowledge it may simply be luck giving some traders the edge – including, presumably, the one whose profit was five times greater than their nearest rival despite their interoceptive ability being bang in the middle of the group. On which note, take a look at this chart.

Regression line plotting score on the heartbeat counting task against the traders’ rank ordered P&L, with 1 representing the most profitable trader, 17 the least.


Source: Scientific Reports 6, Article number: 32986 (2016)


After looking at the chart, if you were presented with a trader with a ‘heartbeat detection score’ of, say, 80, would you bet that he or she was one of the most or least profitable in the group? Frankly, they could be either. As such, you might think, it would take a brave soul to identify a physiological factor such as interoception and, with all the other informational ‘noise’ that goes on in the process of trading, correlate it to real-world events.

And yet the researchers conclude their findings “present anomalous data for the influential Efficient Markets Hypothesis” and “the physiological state of traders does have large effects on their success and survival”. What is more, they suggest, this has “profound implications for the understanding of financial markets, specifically by reorienting attention away from risk-takers’ psychological traits towards their physiological ones”.

Now, clearly a lot of hard work has gone into this study and so we hesitate to be too dismissive. Here on The Value Perspective, however, we suspect that, with such a small sample and time period and so many real-world variables, the same piece of analysis done a year earlier or a year later would have come up with a completely different set of results that would have displayed very little correlation with interoception.

You could, if you liked, call it our gut feeling – something we steadfastly maintain matters a good deal less in investing than following the hard-and-fast rules of an established investment process. And the hard-and-fast investing rules that have been shown to be the most effective over the long term are those of a value strategy, which we will choose over gut feeling every time. In a heartbeat.


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

Important Information:

The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.

They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.