Nobel prize winning psychologist and behavioral economist Daniel Kahneman and several others have demonstrated our shortcomings when it comes to rational decision making. Here’s another counter intuitive perspective on how instinct and intuition can beat elaborate analytical approaches to decision making. In a dated interview for the HBR, psychologist Gerd Giegerenzer talks about how “using heuristics, rules of thumb, and other shortcuts often leads to better decisions than the models of “rational” decision-making developed by mathematicians and statisticians.”

First, he highlights why statistical models built on a rational understanding of how the world operates fails:

“I believe if we teach young people, children, the mathematics of uncertainty, statistical thinking, instead of only the mathematics of certainty – trigonometry, geometry, all beautiful things that most of us never need – then we can have a new society which is more able to deal with risk and uncertainty.

If you’re in the world where you can calculate the risk, then statistical thinking is enough, and logic. If you go in a casino and play roulette, you can calculate how you will lose in the long run. But most of our problems are about uncertainty. So, for instance, in the course of the financial crisis, it was said that banks play in the casino. If only that would be true — then they could calculate the risks. But they play in the real world of uncertainty, where we do not know all the alternatives or the consequences, and the risks are very hard to estimate because everything is dynamic, there are domino effects, surprises happen, all kinds of things happen… and that’s the reason why these models fail.”

To be clear, he is not advocating junking these models. He argues that in addition to these models, good intuition and heuristics can help. Much like in our line of work – investing, we are dealing with the market which is a complex adaptive system, you need a mix of art and science or as some call it – scientific art.

“Gut feelings are tools for an uncertain world. They’re not caprice. They are not a sixth sense or God’s voice. They are based on lots of experience, an unconscious form of intelligence.

I’ve worked with large companies and asked decision makers how often they base an important professional decision on that gut feeling. In the companies I’ve worked with, which are large international companies, about 50% of all decisions are at the end a gut decision.

But the same managers would never admit this in public. There’s fear of being made responsible if something goes wrong, so they have developed a few strategies to deal with this fear. One is to find reasons after the fact. A top manager may have a gut feeling, but then he asks an employee to find facts the next two weeks, and thereafter the decision is presented as a fact-based, big-data-based decision. That’s a waste of time, intelligence, and money. The more expensive version is to hire a consulting company, which will provide a 200-page document to justify the gut feeling. And then there is the most expensive version, namely defensive decision making. Here, a manager feels he should go with option A, but if something goes wrong, he can’t explain it, so that’s not good. So he recommends option B, something of a secondary or third-class choice. Defensive decision-making hurts the company and protects the decision maker. In the studies I’ve done with large companies, it happens in about a third to half of all important decisions. You can imagine how much these companies lose.”

He then compares his view to Kahneman’s System One and System Two thinking and the difference between them.

If you want to read our other published material, please visit

Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.

2024 © | All rights reserved.

Privacy Policy | Terms and Conditions