As investors, we can learn a lot from the way judges approach their daily duties.
They're supposed to be fair and impartial ... sober and even-tempered ... and emotionally detached.
But that doesn't mean they don't get hungry and irritable like the rest of us!
In 2010, Stanford researchers studied judges and their decisions to grant or deny parole to prisoners appearing before the court. They analyzed over 1,100 individual decisions made over the course of a year.
In total, judges approved parole appeals in about one-third of the 1,100 cases studied -- in line with known proportions. However, the researchers discovered that the time of day was a significant factor in judges' decisions...
What it boiled down to: Prisoners who appeared before the court early in the day got more favorable parole decisions. Those appearing just before lunch, on the other hand, were more often denied parole.
After lunch, the number of paroles granted jumped back up to the more favorable, early morning levels. But throughout the afternoon, the rate of paroles granted again trended down, hitting a low by the end of the day.
Here's the chart -- the dotted lines indicate food breaks:
Now, if judges were automatons -- unaffected by hunger, fatigue or mood -- this chart would not exist. Instead, you'd see one steady rate of favorable parole decisions, regardless of the time of day.
But judges aren't robots. Judges are people.
Even though judges are intelligent, well-intentioned and ethical, they still get tired, hungry (even "hangry") and moody like the rest of us. Those subtle fatigue factors have a dramatic impact on their decisions.
There's even a term for this: decision fatigue. It's the observation that people tend to make far worse decisions the more decisions they have to make.
Decision fatigue affects everyone. It taints decisions we face in all aspects of our daily lives -- everything from what to make for dinner to, of course, what to do with our investments.
Do I spend or save? Stocks or bonds? Buy-and-hold or buy-and-fold strategy? Growth or value? Nvidia or Amazon?
As an investor, every decision you make can be hugely consequential to your investment portfolio and your family's financial goals. And you'll be up against decision fatigue every step of the way.
Remember, even judges aren't perfect. So don't expect yourself to be!
But I have a simple solution for you: To avoid decision fatigue, you must reduce the number of decisions you make to a manageable amount.
And that's where systematic investment strategies come into play.
Systematic, or "rules-based," investment strategies minimize your role in the daily decision-making process, thus minimizing the number of opportunities you have to make a subpar decision.
I didn't even know decision fatigue was a thing until I heard that "hangry" judges story myself a few years ago.
But I get it.
While I strive to be cool and analytical, I'm human. I get as decision-fatigued as the next guy!
My evolution as a trader has been one big attempt to minimize decision fatigue. After leaving the Fortune 500 financial planning firm I worked for throughout the 2008 financial crisis, I took a job with a proprietary currency trading hedge fund.
This was not a buy-and-hold firm. We actively traded the world's most volatile markets. We were going long and short -- and making a lot of money doing it.
I did well there, routinely earning "top trader" status. However, I still didn't have complete confidence in my strategies.
I was making buy-and-sell decisions based on the news of the day and my subjective interpretation of how the market would react to that news. Essentially, I was making decisions on my gut. And that made me more uncomfortable as I continued to work there.
So my next move was to a firm that focused on systematic investing. I worked as a client consultant for rules-based, or systematic, investors, and I learned what systematic investing is all about.
It boils down to two simple principles...
You see, the goal of systematic investing isn't just to feel less stress in your decision-making. It's to make money ... as much as you can ... without second guessing or overreacting to the market in a way that loses you money on a consistent basis.
In short, systematic investing is all about making more money with less stress!