Appeal to 'slow mind' to wean investors off F&O

Investors' 'fast mind' gets lured towards the F&O segment, enticed by the prospects of quick gains. A campaign targeting the 'slow mind' can induce prudence

Consider this: A bat and a ball together cost Rs 1,100. The bat costs Rs 1,000 more than the ball. How much does the ball cost? If your answer was Rs 100, that’s incorrect. The right answer is Rs 50.

Nobel Laureate and behavioural economist Daniel Kahneman cites this example in his book, Thinking Fast and Slow, to introduce the concept of the ‘fast mind’ (which provides intuitive answers without conscious deliberation), and the ‘slow mind’ (which is supposed to deliberate and endorse or reject the fast mind’s intuitive answers).

The fast mind’s immediate answers can be frequently wrong. The slow mind is lazy and prone to biases. Yet, with the right training, it can be tutored to amend the fast mind’s intuitive answers. For instance, with repeated exposure to the above puzzle, my fast mind no longer suggests the wrong answer.

This intricate play between the fast and the slow mind was brought home vividly while reviewing Mitesh’s portfolio. Over the past two years, this client has invested across several mutual fund schemes and a Portfolio Management Service (PMS) scheme recommended by us.

The PMS scheme showed an absolute loss. This made Mitesh unhappy. An active mutual fund scheme, too, was underperforming its benchmark and had suffered a capital loss. The loss in the mutual fund scheme did not bother Mitesh. “It is common knowledge that you need to hold mutual funds for the long term to create wealth,” he said.

He was not, however, willing to accord the same leniency to the PMS fund manager, who, according to him, being an expert, should have managed the fund with greater prudence to avoid a loss. It was only by reminding Mitesh of our numerous past conversations about the possibility of active equity schemes underperforming their benchmarks that I was able to convince him to take an equally long-term view vis-a-vis the PMS scheme.

This interaction provided several insights. 

Firstly, Mitesh’s awareness of investment details varied between the mutual fund and the PMS scheme. His fast mind was not triggered by the loss in a mutual fund scheme because he had invested in several schemes via the systematic investment plan (SIP) mode. There he only observed the aggregate amount invested and the current market value of all his schemes and was happy because there was a gain. However, his fast mind was immediately triggered upon noticing the loss in the sole PMS scheme.

Second, while Mitesh was sensitive towards absolute loss, he had overlooked the relative underperformance against benchmarks in both schemes.

The third notable point was the impact of the successful “Mutual Fund Sahi Hai” campaign on his slow mind, allowing him to rationalise the loss in the mutual fund scheme and stay invested for the long term.

These learnings can be extrapolated to address the risky allure of speculative short-term “investments” like futures and options (F&Os), where the greed of the fast mind shows the way. However, the slow mind will surely come into play when serious money is at stake. It can be influenced not to be swayed by the fast mind’s greed impulse by creating an environment where the conventional wisdom is that individuals will lose money in products like F&O.  

The Securities and Exchange Board of India (SEBI) has published data showing that more than 90 per cent of investors lose money in F&O. 

Next, an extensive, creatively orchestrated investor education campaign, complemented by robust media outreach, is required to foster this conventional wisdom.  

The government should pitch in by hiking the Securities Transaction Tax (STT) on individuals investing in F&Os, without extending the higher rate to market makers (non-individuals) who impart liquidity.

Truth be told, weaning individuals off F&O will be a long-haul battle. But the rewards of success will be high. It will lead to accelerated capital formation, augmenting the Rs 15,000 crore already being invested each month by retail investors via SIPs.

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta