We know that in investing, we want to avoid using our System 1 processes. Yet when people consider System 2, they usually call to mind focused, critical or convergent thinking. This type of thinking usually involves reasoning along a logical chain to synthesize information and make reasoned judgments. The approach works well when there is a “correct” solution to a problem, especially with a known technique, such as: what is 2+2?
Another approach involves creative, or divergent thinking, which is more spontaneous. In brainstorming sessions, for example, the goal is to generate ideas/possibilities and explore multiple potential solutions.
You exercise cognitive flexibility, move beyond established thinking, and sometimes stumble on better alternatives.
For example, Einstein was riding in a street car one day when he happened to pass by a clock tower. He wondered what would happen if the street car increased its speed to the speed of light. In this case, from the moving frame of street car, the time on the clock would appear to stop. Thus, his theory of relativity was born, based on a mental leap he made through spontaneous, creative thinking.
Creative thinking can make sense in investing as well. I had lunch with an RIA last week, and he explained to me that during the financial crisis, his clients only wanted to see “safe” blue chip, large-cap names they were familiar with in their portfolios. Now clearly, the fact that such names make you “feel” safe is not a good reason to be invested in them. So in order to do something different you need to get out of your comfort zone.
This is where creative thinking comes in. Creative thinkers explore new areas, and might consider rejecting something simply because it makes them feel safe, or they might consider contrarian views during the process of brainstorming.
So take a walk and explore what might be possible.
David Foulke is an operations manager at Tradingfront, Inc., a provider of automated digital wealth management solutions. Previously, he was at Alpha Architect, where he focused on business development, firm operations, and blogging on quantitative investing and finance topics. Prior to Alpha Architect, he was involved in investing and strategy at Pardee Resources Company, a manager of natural resource and renewable assets. Prior to Pardee, he worked in investment banking and capital markets roles at several firms in the financial services industry, including Houlihan Lokey, GE Capital and Burnham Financial. He also founded two internet companies, E-lingo, and Stonelocator. Mr. Foulke received an M.B.A. from The Wharton School of the University of Pennsylvania, and an A.B. from Dartmouth College.
Performance figures contained herein are hypothetical, unaudited and prepared by Alpha Architect, LLC; hypothetical results are intended for illustrative purposes only. Past performance is not indicative of future results, which may vary. There is a risk of substantial loss associated with trading stocks, commodities, futures, options and other financial instruments. Full disclosures here.