Research on professional expertise theoretically indicates intuition as a crucial component of professional expertise (Eraut, 2000). This study focuses on intuition in the domain of investment. Subjects of different levels of expertise are compared in their forecasts on stock markets. The purpose is to investigate the accuracy of intuitive and rational forecasts. In a first study in 2005 intuitive forecasts have been better than rationally justified ones. A repetition study – ending in December 2006 – tests the finding of the 2005 study.

Does intuition influence the accuracy of forecasts on stock market? A repetition study

Christian Harteis, University of Regensburg (Germany)

Poster proposal for the EARLI conference 2007

Objectives

Research on professional expertise theoretically indicates intuition as a crucial component of professional expertise (Eraut, 2000). This study focuses on intuition in the domain of investment. Subjects of different levels of expertise are compared in their forecasts on stock markets. The purpose is to investigate the accuracy of intuitive and rational forecasts. In a first study in 2005 intuitive forecasts have been better than rationally justified ones. A repetition study – ending in December 2006 – tests the finding of the 2005 study.

Theoretical Framework

Intuition means the domain-specific capability to come to an appropriate decision without deliberately balancing various alternatives and without reflecting on a task (Myers, 2002). Intuition makes use of knowledge-resources persons developed through their career but are not necessarily aware of. This gives experts advantage over persons who do not act intuitively (Hogarth, 2001).

It has been proposed that two parallel systems exist for making decisions: A rationale one and an intuitive one. The rational system demands attention, awareness, and time, whereas the intuitive system stays beyond the level of consciousness and allows quick and appropriate responses. Thus intuition can hardly be verbalized and has to be assessed indirectly.

A typical task in the domain of investment is to forecast developments on the stock market. Even if it is a daily task of investment professionals, it can be done in different ways, depending on time pressure and on the need to rationally defend one’s decisions. In consequence, there is ample variance of individual experiences and of the degree of conscious assumptions. Thus, forecasting tasks are appropriate to investigate intuition (Klein, 2003).

Research Question

(1)     Do intuitive forecasts and rationally justified forecasts differ in accuracy?

(2)     Are experts’ intuitive forecasts better than novices’?

Method

Design

Two groups (n=16 each in 2005; n=18 in 2006) of subjects are compared differing in the factor “level of expertise” (experts, novices). All subjects had to give intuitive and rationally justified forecasts (within-subject factor “forecast” with repeated measures).

Sample

Subjects’ level of expertise was measured by their professional position and by duration of professional activity in the domain.

Measures

In an online questionnaire subjects forecasted the development of six important German stock market values nine months in advance. They had to put the expected number in an input mask. For intuitive forecasts, answering time was limited to 15 seconds, which is considerable time pressure. For rationally justified forecasts no time limit was set, and subjects explicitly had to write down rational justifications of the decision. A basic assumption of this study is that if subjects are forced to rationally justify forecasts, then intuitive ideas are suppressed. Under time pressure however, intuitive forecasts are forced. The accuracy of the forecasts was measured referring to the effective stock prices on December 2005. In order to control for effects of sex, age, and reaction time, these variables were measured in a second online questionnaire.

Results of 2005 and Conclusion

The control variables did not show any significant influence on the results. Concerning the forecasts, the following results emerged:

(1)     Intuitive forecasts were closer to the effective stock exchange prices than rational ones. (T=-2.09, df=31, p=.04)

(2)     Experts and novices did not significantly differ in accuracy of forecasts (Main effect “level of expertise”: F(1,30)=0.196, p=.66)

Finding 1 indicates that intuition can influence the accuracy of stock forecasts. Thus, it can be seen as a component of professional expertise in the domain of investment. However, result 2 shows that also novices can reach experts’ accuracy. This contribution will compare the 2005 and the 2006 study. Results from the 2006 study will be available after December 8^th, which was the reference date for the forecasts.

References

Eraut, M. (2000). Non-formal learning and tacit knowledge in professional work. British Journal of Education, 70, 113-136.

Hogarth, R. M. (2001). Educating intuition. Chicago: University Press.

Klein, G. (2003). Intuition at work. New York: Doubleday.

Myers, D. G. (2002). Intuition. Its powers and perils. New Haven: Yale University Press.