December 26, 2011
Matt Ridley has a nice column about why intuition, gut feelings if you like, can work so well in decision making. I have to admit though, I don’t think it goes quite far enough.
Prof. Gerd Gigerenzer, the director of the Max Planck Institute for Human Development in Berlin, thinks that instead they should boast about using heuristics. In articles and books over the past five years, Dr. Gigerenzer has developed the startling claim that intuition makes our decisions not just quicker but better. He rejects the notion that hunches are second best, trading off accuracy for effort to achieve decisions that are “good enough” but not perfect.
As Dr. Gigerenzer sees it, complex problems do not necessarily need complex solutions, and more detailed analysis does not necessarily improve a decision, but often makes it worse. He believes, in effect, that less is more: Extra information distracts you from focusing on the few simple aspects of a problem that matter most.
While I’ve no problem with this at all I think we can take it further as to why rules of thumb often work very well in decision making.
First I’d call into evidence Hayek’s insistence that information (perhaps not all of it but certainly a huge amount of the relevant such) is local. It resides in the specific and exact knowledge of those people who actually do whatever it is. One example might be a baker kneading dough. He’s been doing this 20 years and doesn’t time or even measure anything. He can tell just from the look and the feel whether more or less of an ingredient, or more manipulation, is necessary. Something neither you nor I would be able to do and something that we would have to follow a very detailed recipe to do ourselves.
Then I’d point out that much of this local knowledge actually becomes formalised in rules of thumb, we can call it intuition, gut feelings or even heuristics of we like. It isn’t that we, as beings of God-like genius, simply know how to do something and can thus just guess at the answer. Rather, it’s that we’ve been doing whatever it is long enough that we have reservoirs of possibly unarticulated knowledge that lead our intuition to what is the correct answer.
A little example from my day job dealing with one of the rare earth metals. There’s a couple of companies out there looking to open new mines to extract this metal. They might be successful (certainly, there’s no technological reason why they shouldn’t be able to extract it from the ore they’ll be digging up) and they might not be. But I’ve simply rejected their approach as being near ridiculous. Entirely the wrong path to take in pursuit of this metal. This is, further, without even examining the details of their plans and methods.
I’ve just looked at the concentration they’ve got of the target metal in the ore they want to process. At that point, I’ve simply rejected it as a viable source.
That’s very much a gut feeling, intuition, but it’s backed up by all that local knowledge I’ve got from having spent 15 years dealing with this one rare earth metal.
The most important part of which is that the concentration they’re talking about, there are tens (certainly) and possibly hundreds of places around the world that you can get the same concentration of the same metal. And not in ores that you have to dig up either. But in the wastes of other mining processes. Which brings us back again to local knowledge and gut feelings.
If you analysed their plans properly, you wouldn’t see anything wrong with them. The metal is in the ores they’re after, it is possible to extract it from those ores, there are people who will buy it once extracted. So if you did the normal analysis you’d assume that they were just fine.
But that wider industry knowledge, that Hayek bit, leads to the rule of thumb that if you’re going to extract from an ore with that (low) concentration of the metal you wouldn’t go and dig a hole in the ground to get that ore. That’s waaay too expensive. You would go to one of the places where the ore has already been dug up, been processed for its other contents, then ask politely if you can have the wastes left over, then process them.
Which is, I would submit, why gut feelings and rules of thumb from experts in their field are so useful as a method of business decision making. Because, consciously or not, such experts are processing the available information, information simply not available to those not expert but approaching the same decision in a more structured and formal manner.
There is a flip side to this of course: experts, when off their own turf, when outside their knowledge base, are just as likely to be wrong as anyone else. Perhaps more so in fact, as being often right in one area leads to the over-confidence that you’re right in all (I have been known to suffer from this one myself). All of which leads the outside observer to something of a quandary. Real experts, in their area of expertise, can use rules of thumb and intuition and their doing so will probably lead to better decisions than any other method. But how do you know when someone is limiting themselves to their area (s) of expertise?
That’s a tricky problem.