Intuition

So many people have come and gone
Their faces fade as the years go by
Yet I still recall as I wander on
As clear as the sun in the summer sky
--Boston

Have been (very slowly) chewing thru Daniel Kahneman's (2011) book, Thinking, Fast and Slow. Kahneman, along with his late colleague Amos Tversky, won a Nobel in economics for their work on prospect theory (Kahneman & Tversky, 1979)--theory that has made its way into these pages now and then.

This book is essentially an aggregate of Kahneman's research and thought in decision-making and judgment. There are many nuggets that I hope to reflect on here. Right now, I wanted to jot a quick thought on intuition.

Intuition is knowing something without having to engage in large amounts of analysis. Instinct. Kahneman is skeptical about the value of intuitive judgment in many situations. This is because the human mind is subject to many biases (overconfidence, confirmation, anchoring, availability, etc) that lead us to believe something is true when is is false. What we believe to be intuitively correct is often incorrect. Kahneman presents evidence to confirm this.

However, there are situations where intuition obviously 'works.' Chess players, professional athletes, firefighters, and other groups often display uncanny instinctive judgment. Simon (1987), among others, attributes intuition to intense pattern recognition processes, where the mind combs vast previous experiences for situations that match the present case.

High degrees of intuition therefore require practice, experience, and feedback so that individuals can learn relationships between variables and file large numbers of useful cases in memory for future retrieval.

Kahneman suggests that high levels of experience are not enough. The learning environment must be conducive for learning about true relationships between variables. The environment must have a limited number of variables that do not change much over time--as well as small enough lags between stimulus and response to enable the understanding of true relationships.

Stable contexts like chess and firefighting fit this profile. Turbulent contexts like markets and political punditry don't.

As such, Kahneman concludes that making good intuitive judgments about markets and investing/trading decisions is very difficult if not downright impossible.

Not sure I totally buy into his conclusion. After all, it is possible that some individuals are able to identify critical variables and relationships better than others--even in turbulent environments.

That said, the core message from Kahneman is a good one: think twice before acting on your next 'feeling.'

References

Kahneman, D. 2011. Thinking, fast and slow. New York: Farrar, Straus and Giroux.

Kahneman, D. & Tversky, A. 1979. Prospect theory: An analysis of decision under risk. Econometrica, 47: 263-291.

Simon, H. 1987. Making management decisions: The role of intuition and emotion. Academy of Management Executive, 1(1): 57-64.