"Gut," replied Carnival CEO, Micky Arison, when I quizzed him, while interviewing him for a research project on CEO decision making, on how he arrived at the most important and fruitful decision of his career: the $5.45 B acquisition of Princess Cruises. I must have seemed somewhat puzzled for Mr. Arison emphatically clarified, "I trust my gut."
Arison's assertion, in various forms, was repeated over and over as I continued my interviews of twenty leading CEOs about two major decisions in their careers: one that turned out well and one that did not. Whether the decision they were discussing had been successful or not, in virtually every case, the CEOs said they mostly relied on "gut feel" or "intuition" to make those decisions.
If intuition is the muse in CEO decision-making, does it, however, make for better decisions? Quants say we use intuition because of our cognitive limitations. It is a strategy of last resort, employed when we can't use expected utility theory (optimal weighting and computing of all relevant factors). Professor Gerd Gigerenzer, director of one of the famed Max Planck Institutes, disagrees. He believes in certain circumstances, heuristics (implicit rules of thumb, the building blocks of intuition) can actually lead to better choices. Others believe the role of intuition may just be random.
To begin to settle the debate, I included a follow up question in our interviews. I asked CEOs to estimate how knowledgeable they were in the area in which they had made the decision. Not surprisingly, their success rate was several times higher for decisions made in the fields where they had expert knowledge. If intuition is indeed the handmaiden of experience, it stands to reason that those decision-makers who have passed Herb Simon's 10,000-hour experience threshold would have higher quality intuition.
It turns out, then, that it is not simply a question of whether a decision-maker should trust his or her "gut" or not. It depends, and experience is one differentiator.
Take Micky Arison, widely considered the world's top expert in the cruise ship business. He knows his own company inside and out and it accounts for half of the world's cruise ship business. Similarly, when I asked Micron CEO Steve Appleton a question regarding his knowledge of the memory business when he acquired the Texas Instruments' memory division, he felt he knew as much about the memory business as anyone in the world. When Ray Stata made a "bet the farm" decision by funding Analog Devices Semiconductor and personally guaranteeing the investment, he was already a pre-eminent visionary in the world of electronics.
In each of these cases, intuition worked. All three were experts in their field; all three decisions were wildly successful. When these three superb decision-makers delved into an area outside their expertise or where they were not yet experts, however, their "intuition" failed them: Arison's launch, early in his career, of a new cruise line, Appleton's venture into graphics, and Stata's commitment to a venture capital fund for Analog Devices all turned out to be failures.
Successful and consistent deployment of intuition, however, requires more than just domain knowledge. It also requires deep introspection, "an intense journey into yourself." If you are going to understand the biases, emotions, and offsets of your decision-making compass which may effectually trump your domain knowledge and result in poor judgments, you must learn to "observe all men, but yourself most."
The mother of all such poor judgments is illustrated by a decision made by Warren Buffett early in his career. He describes it as his $200 billion blunder. In the 1960s, while searching for opportunities for investment, Buffett noticed that Berkshire Hathaway, a textile company, was gradually selling off its mills. The company would sell off a mill and use the cash to buy back its stock, and the stock would experience a corresponding increase in value in the months after the sale of the mill. Buffett watched as the pattern repeated itself and shortly before the sale of another mill by Berkshire, he took a substantial position in the company's stock. Subsequently, he met with Berkshire CEO Seabury Stanton and gave his word on a deal to tender his stock at $11.50, looking to make a tidy short-term profit.
Shortly after the verbal deal was struck, Buffett received a letter from Stanton offering to buy Buffett's shares for 11 and three-eighths. Buffet, a man whose word is his bond, felt he had been "chiseled" by an eighth of a point and began to acquire Berkshire Hathaway stock until he had majority control of the company. He then fired Stanton.
Buffett now owned a terrible business into which he poured millions of dollars for more than two decades before giving up. Buffet figures that if rather than making such a poor investment he would have poured all that money into his preferred investment area, insurance, Berkshire Hathaway would be worth twice as much as it is today, or about $200B more.
Buffett was 34 at the time; now in his 80s, with 46 additional years of experience, he recognizes that, "seek revenge at any cost" is a practice to be avoided. In conversations about his actions regarding Berkshire Hathaway, Buffett wistfully recalls — and regrets — his youthful intuitive mistake and the immense amount it cost his shareholders.
The effectiveness of intuition, then, is relative. At its best, the key to effective, intuitive decisions is best conveyed in two wise sayings: "Know your business" and "Know yourself." The sweet spot for business decisions is when both domain knowledge and self knowledge are high; when you have the knowledge to shrewdly interpret the facts and the wisdom to steer clear of the biases and destructive emotions that can hinder success.
Reviews on this topic:
My real mechanic confirms my gut instinct that I needed new tires last month, when they were on sale, when my non-mechanically-trained intellect looked at the tread and said, "oh, there's still a lot there..." My sensible 35-years of driving intellect says, "OK, suck it up and get tires; trusting my gut now is stupid."
Blink proported to be about trusting one's instinct, but the real take-away to me was that the only people who had instincts worth trusting had also spent years learning their trade.
For me, the real trick comes in knowing when I am "on my game" and know enough about the field to be able to trust my gut, and when I need to go with the outcome of research and analysis. Even when I'm "on gut," I should be able to get quiet and identify at least a few triggers / symptoms / signals that gave rise to the decision.
