The investing world can be an extremely complicated place, full of complex ideas, unique and convoluted jargon and enough advanced metrics to give anyone a headache. It would take an intellectual genius to understand everything happening on Wall Street.

Fortunately, for the majority of Americans that didn’t make a perfect score on the SATs, a high IQ may not be the most important part of successful investing.

Most people are familiar with IQ, or intelligence quotient, as a measure of how smart a person is. An IQ is measured by tests that assess the ability to understand and apply information, perform logical reasoning, think abstractly and spatially, solve mathematical problems and excel in other complex cognitive tasks. This type of intelligence is typically associated with strong performance in school, or “book smarts.”

However, in recent decades, psychologists have increasingly recognized that there is more to intelligence than answering complicated test questions. In 1983, Howard Gardner first discussed the idea that there are different types of intelligence outside of IQ that help explain why other people excel in areas where people with high IQs sometimes struggle. One of Gardner’s proposed intelligence types, “intrapersonal intelligence,” is the precursor to what psychologists today call emotional intelligence, or EI.

EI is a measure of a person’s ability to recognize, assess, control and even manipulate emotions within themselves and others. The skills involved in EI are not typically the kinds of things that show up in a textbook or on a standardized test. They are the type of skills needed for introspection, self-awareness and empathy. EI is the type of intelligence that can play a large role in making someone a good parent. If you need someone to talk to about a personal problem, you probably don’t think to talk to your friend with the highest IQ. Those situations typically require EI instead.

“Emotions are a far more important driver of success than IQ. What made Warren Buffett such a great investor was not just superior intellect, but emotional fortitude to stay true to his strategy during deep drawdowns,” Batnick says.

IQ may be useful when it comes to analyzing complicated investments. However, patience, discipline and perspective are all more closely-tied to EI than IQ. Batnick says these traits are far more important than IQ when it comes to investing success.

In fact, he has repeatedly seen extremely smart investors fall victim to deficiencies in EI.

“There are a lot of ways that smart people lose money. One of the most common ways is venturing outside their circle of competence after seeing other investors make money faster than they do,” Batnick says.

Martyn Newman, executive director at RocheMartin, has witnessed similar investing struggles among people with high IQs. “Those that lack emotional intelligence tend to lack self-control and self-reliance and can be impulsive in their nature, all of which can lead to bad investment decisions,” Newman says.

Newman believes the most iconic investors of all time, including Warren Buffett, Carl Icahn, George Soros and Benjamin Graham, have all demonstrated emotional intelligence in their investment decisions.

“All of the above can be described as having good self-control and high self-confidence that allows them to act boldly and be as successful as they have been in the financial markets,” Newman says.

There are plenty of things investors can do to improve EI
Machel Strahilevitz, a visiting associate professor at Duke University’s Center for Advanced Hindsight, researches the role emotions play in investing and how investors can harness their emotions to improve portfolio performance. She says that good emotional decisions begin with good emotional health.

“Taking care of yourself makes it easier to maintain emotional balance and curb impulsive behavior you may later regret,” she says. “This includes sleep, exercise, eating healthfully, spending time with loved ones, doing things for others and making time for fun.”

Strahilevitz’s research at Duke suggests that emotional stability, frequency of pleasant emotions and social support often correlate with superior investing decision-making.

Batnick says improving investing EI requires more than self-awareness.

“One thing that investors can do, and I’d guess less than 1 percent actually do this, is have a written plan before they make any investment. Having an exit plan on the way up and on the way down beforehand is a good way to minimize emotional involvement,” he says.

Sometimes it doesn’t matter how much complex quantitative analysis you perform on a stock. At the end of the day, share price is determined by the market, not by a number that a supercomputer algorithm spits out.

Financial markets are made up of millions of people around the world. Understanding how other investors are feeling, identifying why they are buying and selling and anticipating what they will be doing next all involve emotional intelligence.

Instead of succumbing to frustration, investors that have consistently struggled in the market should first try…

Click here to continue reading

Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!