most decisions since System 1 is quick, led by intuition and cognitively less burdensome.
When faced with conflicting information that cannot be easily resolved, System 2 participates
to process the information carefully and logically, leading to a more informed decision. Since
System 2 is effortful, slow and time consuming, it is infeasible to use System 2 for every
decision we make and we reserve our mental resources for the more consequential
decisions. Table 1 compares the characteristics of System 1 and System 2 and how these
systems manifest in the making of investment decisions.
Table 1: System 1 and System 2 compared
Examples in investment
Fast, automatic, frequent, emotional,
Cognitive short-cuts, simple heuristics,
naïve diversification, simple division.
Create a financial
plan, an optimal asset
allocation strategy and
a rebalancing and
When providing advice, advisers are in-effect engaging with these two systems of reasoning
that underpin various aspects of investment decision making.
We propose that when offering cognitive assistance, the two systems leverage different
types of adviser skills and functions. System 1 which is driven by emotions and gut feelings
leverages advisers' interpersonal skills and emotional intelligence. Advisory functions that
predominantly engage with client emotions and hence correspond to System 1 include
helping clients understand their goals, dreams and reason for investing, short term and long
term liquidity needs, reducing client anxiety when markets are turbulent and helping clients
avoid impulsive decisions about stocks. System 2, which is led by logical reasoning and
calculations, leverages the technical expertise and knowledge of advisers. The related
advisory functions are ‘economic’ in nature such as helping investors design portfolios that
suit their goals and ongoing rebalancing of the portfolios to ensure they stay on track and
that transactions are tax efficient.
Research shows that while knowledge and expertise is the key reason investors seek
advisers, interpersonal skills are most valued aspects of investment advice. In a survey of
512 clients,1 80% of the respondents voted knowledge and expertise as the main reason for
using an adviser, while other reasons such as access to information and lack of time were
voted as a reason by under 15% of the sample population. However, when asked the skill
they most valued in an adviser, 82% of the respondents voted for interpersonal ski