We are huge fans of Daniel Kahneman, as our work (and life) requires us to separate our instincts from the thoughtful processes we commit to our clients and he helps separate the two for us. We featured an interview on his latest book “Noise” a couple of weeks ago, which takes this subject deeper. But here’s a checklist of sorts to assess when and where we should trust our instincts and not:
“Kahneman’s problem with gut instincts — or what he terms our brain’s fast-thinking “system one” — is that it relies on rules of thumb that often turn out to be wildly wrong. We try to get a handle on how common something is by how many examples of that thing we can remember, for example. The problem with this is that it leads us to wildly overestimate the frequency of highly memorable but actually extremely rare occurrences, like airplane crashes. As Kahneman explains in his book, our intuition is riddled with these errors.
On the other hand, we all know intuition isn’t totally useless. If you get the feeling your spouse is angry with you, you had best head straight off to the florist’s shop. Or, consider the case of a veteran firefighter saving the lives of his men with a gut instinct that a particular blaze was about to turn deadly, a story Kahneman shares in his book.
So how can you recognize when your gut is about to save your life (or your marriage) and when it’s just a dumb shortcut?
According to ThinkAdvisor, in a recent talk at the World Economic Forum, Kahneman offered a thankfully simple answer to this decidedly hard question. It took the form of three questions. If you can say yes to each, then go ahead and trust your gut. Otherwise, you’d better check your instinct against some actually data and hard reasoning:
“Kahneman’s problem with gut instincts — or what he terms our brain’s fast-thinking “system one” — is that it relies on rules of thumb that often turn out to be wildly wrong. We try to get a handle on how common something is by how many examples of that thing we can remember, for example. The problem with this is that it leads us to wildly overestimate the frequency of highly memorable but actually extremely rare occurrences, like airplane crashes. As Kahneman explains in his book, our intuition is riddled with these errors.
On the other hand, we all know intuition isn’t totally useless. If you get the feeling your spouse is angry with you, you had best head straight off to the florist’s shop. Or, consider the case of a veteran firefighter saving the lives of his men with a gut instinct that a particular blaze was about to turn deadly, a story Kahneman shares in his book.
So how can you recognize when your gut is about to save your life (or your marriage) and when it’s just a dumb shortcut?
According to ThinkAdvisor, in a recent talk at the World Economic Forum, Kahneman offered a thankfully simple answer to this decidedly hard question. It took the form of three questions. If you can say yes to each, then go ahead and trust your gut. Otherwise, you’d better check your instinct against some actually data and hard reasoning:
- Is there actually some regularity in this area you can pick up and learn? Intuition develops from experience, so for your gut to spot trends and patterns, reliable trends and patterns must actually exist. What areas of life have sufficient regularity for our brains to develop accurate intuitions? “Chess players certainly have it. Married people certainly have it,” Kahneman told the audience. However, the stock market is simply too noisy and irregular for anyone to understand on gut instinct.
- Have you had a lot of practice in this area? Again, successful intuitions are born of long observation of environments with some level of pattern and regularity. Good gut instincts therefore require a lot of practice — and we’re not talking just a few weeks. Years and years or experience, like the fire chief had under his belt, are generally needed.
- Do you receive immediate feedback in the area? Practice isn’t just about doing something over and over again. You can saw away badly at the violin for years and never come any closer to being able to play Beethoven. For practice to work, you also need feedback, and not just any kind of feedback. Psychology shows the kind that works best is immediate and concrete. If you want to train your intuition, “you have to know almost immediately whether you got it right or got it wrong,” Kahneman explained.
So next time your gut is screaming at you to do or not do something, take a moment to check in with science. Is this an area where patterns actually exist? Do you have long experience of the subject? Have you tested your understanding of it against reality previously? If you can’t answer yes to all three of these questions, take a step back and think through the problem more rationally.”
If you want to read our other published material, please visit https://marcellus.in/blog/
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. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
