April 13, 2010
The role of intuition
Mauboussin is not convinced that the message of Malcolm Gladwell’s book Blink, which celebrates the value of intuition, is correct. “Intuition definitely has a role in decision making, and in many cases important one,” he said. “But I believe intuition has been vastly over-glorified in terms of its significance.”
He said that psychologists have identified two systems of decision-making. One is an experiential system, which is fast, automatic, and very difficult to train. It’s what causes you to jump when you see a snake.
The other system is analytical, and is characterized by slow, purposeful, and deliberate analysis. Unlike the experiential system, it is malleable and trainable.
In most activities, we start in the analytical system and, with enough practice and experience, our decisions slip more into the experiential realm. For example, as one learns the game of chess, each move is carefully considered. A grandmaster, however, can quickly assess a position and determine which side has the advantage and what would be the best moves.
“Relying on your intuition makes sense when the system is stable and linear, such as with board games, sports, and in some military settings,” he said. If a system is unstable and non-linear, though, then all bets are off with respect to your intuition.
An unanswered question, according to Mauboussin, is whether markets are stable and linear or unstable and non-linear. The answer dictates the degree to which you should rely on intuition in your investing decisions.
Some practical advice
Mauboussin offered several suggestions to facilitate better decision-making:
- Maintain a decision journal, such as an investment journal. Record what you decide, your thought process, what you expect will happen, and how you feel physically and emotionally. Mauboussin warned that this could be a humbling and embarrassing exercise, but the benefit is that you can prevent hindsight bias – the inclination to see events that have occurred as more predictable than they in fact were before they took place.
- Create a checklist of things to consider or tasks to perform before making a decision. In fields as disparate as medicine, aviation, and investing, studies have shown that the use of checklists can improve outcomes without improving one’s skill set. “You don’t need to be smarter or better trained, just better organized,” Mauboussin said.
- Perform a pre-mortem. Before you make a decision, put yourself in the future and write down why that decision didn’t work out. Mauboussin said this technique often results in documenting 30% more issues than one otherwise would and has proven to be very powerful by the organizations that use it.
“Recognize when you need to think twice,” Mauboussin advised. The keys are when the decision is consequential and in one’s decision-making danger zone. “Slow down and bring in a friend, a family member, or a colleague,” he said.
Much of the literature suggests there is a rational way to make decisions, and yet most of us operate in a sub-optimal manner, making decisions that are, for example, predictably irrational, as Dan Ariely contends. Mauboussin did not dispute this view. Instead, he said, the prevalence of sub-optimal decision-making creates the opportunity for outperformance by reducing one’s “unforced errors” in decision-making. The result? Those who heed his lessons – betting against Big Brown, for example – can take advantage of those who don’t.
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