Last month, I started a regular column on the power of intuition in investing that inspired many of you to write to me directly to discuss your experiences. While most of you viewed intuition positively, your responses indicated you still weren’t sure how to define it (i.e., that it lacked a central idea). You also expressed some reservations about applying intuition to investing because it is perceived as unreliable. Both these observations stem from the fact that we lack a simple, broadly adopted model of intuition to aid our understanding. With that in mind, here is my model. I hope it provides you with greater clarity.
A Simple Model of Intuition
Intuition is neither System 1 nor System 2 thinking as defined by Daniel Kahneman. Instead, intuition is a different category of mental action that is distinct from both instinct and deliberation. Intuition is a sense exactly like the five standard senses. Here is a simple model for understanding intuition as a sense:
Intuition is sensory stimulus followed by interpretation.
As with all of the senses, it takes time to map our abstract sensations to the specific causes/objects of that sensation. With hearing, for example, it can take a lot of effort to tell the difference between an oboe, a bassoon, and a clarinet. Or the difference between a viola and a violin. Or the difference between cellists Yo Yo Ma and Julian Lloyd Webber. In wine drinking, is that red a Merlot or a Pinot Noir? Even with vision, the least abstract of the senses, it takes effort and practice to map the objects that we perceive. Is that a peach or a nectarine?
If you say it is a violin when it is a viola, few would deny the authenticity of the stimulus or blame hearing, instead we would blame the interpretation of the stimulus. Intuition and its interpretation are comparable to the same problems we encounter with the five senses. Is my intuition communicating I should buy or sell that security? Are equity markets in bubble territory or priced just right? Is that executive telling me the truth, or is she telling me only a partial truth?
Why Intuition Is Difficult to Interpret
Interpretation of intuition is difficult because signals are:
- Ignored;
- Obscured; and/or,
- Misunderstood.
Lack of Awareness
Very few of us spend time trying to hear our inner voice, or the sixth sense, to which intuition is frequently referred. Intuition is operating always, but its signals are ignored. For example, unless we are eating food or drinking liquids, how many of us are focused on our sense of taste? Not many. Yet, taste is always there, just ignored. Intuition is more neglected even than taste. Without awareness of intuition, it is impossible to get better at interpreting its signals.
Too Much Emphasis on Analysis
Most people spend years trying to improve their analytical, or System 2, abilities. Educational systems throughout the world favor empirical over experiential learning. They prefer quantification to qualification. There are many good reasons for these choices, and I am very pleased with the fruits of my empirical, analytical education. But the specificity that this state of consciousness demands happens to be the very thing that obscures intuition. Instead, intuition thrives, as do all of the senses, in an environment of first, receptivity — and then, and only then, on specificity.
A thought experiment may prove useful. First, be honest with yourself as you are the only witness to this experiment. Take 30 seconds to tune into the feeling of the temperature of the room. Tune in now and come back here in half a minute. Did you do the experiment? During the experiment did you think to yourself, “I wonder what the point of this is?” or, “It feels like it is about 72° F/22° C?” or, “I think it is a little cold in here?” In the many years of doing this thought experiment, I have only encountered two people who only spent the 30 seconds with the feeling of the temperature of the room. Overwhelmingly most of us take our abstract sensations and immediately translate them into a form amenable to analytical thinking; namely numbers or words.
Yet, our experience of the feeling of the temperature of the room exists independent of our ability to describe it. A dog or cat in the same space would also have the sensation, if not the words or numbers to assess it. The results of this experiment are strong evidence of how rapidly we ignore the savoring of our senses and immediately move on to assessment and analysis. Intuitive sensation, even if it is recognized, which it usually is not, is often immediately converted from its native form — a sensation — into something nonnative: numbers or, more typically, words. So the intuitive sense is usually immediately smeared beyond recognition so again interpretation is impossible.
Lack of Interpretive Skill
Even if people pay attention to their intuition and savor the sensations it provides, the difficult task of translation remains. Poets, artists, and composers are skilled at translating their abstract sensations into a recognizable and transmittable form. But for most of us, this ability to translate remote and abstract sensations remains very difficult. Consequently, it could be that you know there is something strange about an investment in your portfolio, but you “just can’t put your finger on it.” Again, the result is that intuitive sensation is misinterpreted, leading to inaccurate judgments. Take heart, though, as translation of intuitive sensations is a skill that can be learned.
In coming months I will discuss how to begin bringing intuition more into your conscious awareness and how to translate it into something useful. Thank you again for your open-mindedness!
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28 Comments
thank you, jason. is this coming from kahneman or is it something new? is this your own theory? in any case, it sounds very interesting although i have yet to really understand it. i eagerly await the details in the coming installments on this subject.
Hello Jamal,
Thank you for your comment and for your question. This is my own model of intuition, not a theory. See the guest editorial from Dr. Emanuel Derman entitled, "Knowing the World: Intuition, Theories, Models, and Data [https://blogs.cfainstitute.org/investor/2013/12/09/knowing-the-world-in…] " to understand the distinction I am making. Intuition is a topic that neuroscientists are just starting to explore, so it will be many years until there is an appropriate theory. However, the model I describe in this post helps to explain what is intuition, why it can be difficult to apprehend, and why people sometimes find it unreliable. It also separates it from instinct.
I hope this helps to clarify.
With smiles,
Jason
brilliant
thanks
Thanks, Jamal!
Thank you for these interesting posts.
There is a literature on the development of abilities (like telling instruments from each other). Most of it is focused on the development of expertise. Separate streams examine the development of expertise in sport, other fields (e.g. playing music) and trading in the financial markets. It is from this field that the famous "10,000 hours of deliberate practice" rule of thumb comes from.
I think that investors who think they apply intuition successfully are kidding themselves. Most investors do not get deliberate practice (that is, effortful practice with clear, quick feedback) because most investors do not track the results of their decisions clearly and because, even for those that do -- say with proper attribution of every single decision -- feedback tends to come a long time after the event.
Even for the small number of investors who do get deliberate practice, many make decisions so rarely that to notch up 10,000 hours would take an implausible amount of time. This is especially an objection to tactical asset allocation, where a practitioner may make, at most, one decision a month. Even if we allow that every decision counts as a full 12-hour day of deliberate practice, that is still only 144 hours a year, meaning it would take about 70 years to notch up the necessary experience (and, no doubt the market regime would change in that time in any case).
Your account also requires that there should be something there that can be known intuitively. There really is a difference between a clarinet and a bassoon, and that difference can be detected by a computer. There really is a small-cap effect, and that effect can be discovered by time-series analysis. To use an analogy, if you have a farm, there is no point in going out into the fields with a really sharp scythe if no wheat has actually grown. For your view of the usefulness of intuition to be useful (over and above analysis) you must hold both that there is something there to be "intuited" and that that thing cannot be found by analysis. There are such things -- in particular, the subtleties of human social interactions, which we are all more-or-less naturally adept at understanding -- but I do not think it is plausible that the relevant kinds of things exist in the financial markets. Human beings are naturally very bad at understanding financial markets!
So I think that investors who think that they have intuition are either not tracking their performance properly (over a long time period and compared to a relevant benchmark), or have earned a risk premium or exploited a market anomaly that they did not understand, by random chance. Some monkeys are bound to win in any coin-flipping contest.
Finally, on your proposed model of intuition: this is really a definition, not a model, and it is so wide as to encompass anything. An interpretation could clearly be a system 1 or a system 2 activity; the kind of things you talk about (e.g. telling one wine from another) is clearly a system 1 activity. You do not give a reason for rejecting a two-system model of the mind, and the alternative you propose can co-exist with it perfectly well.
Hello John,
Thank you for your fantastic and very thoughtful response and for your willingness to engage in a conversation. I will try and take your points, in turn.
* RE: "There is a literature on the development of abilities."
I would love for you to send these on to me. Perhaps by posting links here in the comments section for me and for other readers?
* RE: "I think that investors who think they apply intuition successfully are kidding themselves. Most investors do not get deliberate practice (that is, effortful practice with clear, quick feedback) because most investors do not track the results of their decisions clearly and because, even for those that do — say with proper attribution of every single decision — feedback tends to come a long time after the event."
I agree with you entirely that the organization and interpretation of intuition takes a long time to develop. I certainly do not consider myself to be a master, say in the same vein as a sommelier is an expert at distinguishing grapes and vintages. Did you happen to read my post that essentially argues your very point about the proper way of measuring your investment success? You can find it here: http://blogs.stage.cfainstitute.org/investor/2014/05/26/how-to-measure-… Essentially what I said was that investors must become much more aware of the decisions that they are making and to improve their consciousness to be able to record their decisions.
* RE: "...to notch up 10,000 hours would take an implausible amount of time."
Several points...investing in its most general form is simply making decisions now that you hope result in benefits exceeding costs. We make these kinds of decisions all of the time. What route to drive home is not that different from which security to purchase from an issuer. So practice opportunities abound for investors. In my book The Intuitive Investor I argue that one of the things that makes you much better is to switch your primary context/mental filter to that of an investor. When you do this, then the walk through Times Square becomes an opportunity to learn as an investor. There are approximately 5,844 waking hours in a year so there is much opportunity to master anything that one desires to master.
Next, if intuition is a sense, which I think it is, then it is in operation all the time in any case. So it is portable. Where you go, it goes. So there is ample opportunity to utilize it.
And I think you would agree with me that 10,000 hours is an arbitrary number, certainly not a definition, or a model, and pretty squishy data.
* RE: "Your account also requires that there should be something there that can be known intuitively."
Here we probably disagree. I do think there are things to be known intuitively. Think: the mood of the market, for example. You took the conversation to a domain where it sounds like you think intuition might be in operation, "the subtleties of human social interactions." But I think intuition, while useful in this domain, is a bigger and better tool than that and can be more interestingly utilized. Question for thought: from where do scientific breakthroughs come? What happened before the big bang?
Also, you seem to have an implicit mental model in operation with regard to 'analysis.' Namely, that it is a purely rational process. Here I quote from the comments section of another post that I think will express my view point and highlight the importance of creativity and intuition in analysis:
"Regarding your point about good deductive reasoning…I used to say, and still on occasion say, when being interviewed on the subject of investment management that it is exactly like detective work, equal parts analysis and creativity. If you were to invite 10 detectives to a crime scene, say a bank robbery, there is certainly something to be said for the skill level of fact gathering. But there are literally a billion points of data that could be relevant. But the detective that solves the crime is the one that can identify the pertinent facts out of the myriad number of them – I consider this to be a rendering of creativity – as well as, and more importantly, understands the story that the facts are telling her and who can reconstruct the theory of, or story of the crime. Creating a narrative around facts is a creative process. So, more directly, I think deductive reasoning is an example of the holistic marriage of analysis and creativity. My own opinion is that many people think of creativity as synonymous with the arts or with “what’s new.” When, to my mind, creativity is also about choices around connections, or permutations of knowledge. Another bias is that the developers of logical topology are, well, logical. If logical topology had been developed by Picasso or Dali I think we would think of reasoning as more creative than we normally grant it to be."
So, in other words, I think that creativity and intuition are the silent and underappreciated partners in reasoning. Including all 'Aha!'/break-through moments.
Also, I agree with you that people are bad at understanding financial markets, but they were also very bad at understanding the cosmos for literally millions of years. Most of the breakthroughs in scientific understanding having come only recently in terms of human history. I would argue that astrophysicists inventing a 90% plug, dark matter and dark energy, that is the method for adapting relativity to the reality is a metaphysical leap of faith.
* RE: "Finally, on your proposed model of intuition: this is really a definition, not a model, and it is so wide as to encompass anything."
If you take Einstein's simple model of energy, E = MC ^2 and recognize that C ^2 is simply a constant you have a very simple model: energy = mass. This is a widely accepted simple model...and a definition. So I accept your comment as a compliment.
I do not reject Kahneman's System 1 and System 2 thinking, I say that it is incomplete. Take a look at this post to see more of the reasons why, as well as my definition of intuition: http://blogs.stage.cfainstitute.org/investor/the-intuitive-investor-def…
For example, Kahneman's System 2 presupposes knowledge, but cannot really explain innovation or intuition. So naturally I agree with your stating, "the alternative you propose can co-exist with it perfectly well."
Thank you again for your comments!
With smiles,
Jason
Sorry for the delay -- was reminded about this by your latest post.
For references try the bibliography in "The Genius in All of Us" by David Shenk.
"Several points…investing in its most general form is simply making decisions now that you hope result in benefits exceeding costs. We make these kinds of decisions all of the time. What route to drive home is not that different from which security to purchase from an issuer. So practice opportunities abound for investors."
This will teach decisiveness -- indeed, I learn decisiveness in life in general before I applied it to trading -- but it will not give you intuitive expertise in a specific domain.
"And I think you would agree with me that 10,000 hours is an arbitrary number, certainly not a definition, or a model, and pretty squishy data."
The point is that it is probably the right order of magnitude of expertise.
Re. analysis and creativity, I think we are talking at cross purposes here. Clearly it is useful for human beings to be creative in their analysis, and it is debatable how far that creativity belongs to system 1 or system 2. But investment decisions should be based on a model, not a gut feel: creativity is useful if it helps you build a better model.
"Also, I agree with you that people are bad at understanding financial markets, but they were also very bad at understanding the cosmos for literally millions of years. Most of the breakthroughs in scientific understanding having come only recently in terms of human history. I would argue that astrophysicists inventing a 90% plug, dark matter and dark energy, that is the method for adapting relativity to the reality is a metaphysical leap of faith."
I am not sure what you are saying here, but this is exactly the point I am making. Science is the way we come to understand things we did not understand before.
I think perhaps you are thinking of science too much through the eyes of an individual scientist. Scientists may make "intuitive leaps" (really, an organisation of facts that takes some time to brew in the mind). But a "leap" can also be a leap into a precipice -- it can be completely wrong. Our understanding of the cosmos has not progressed because we all have intuitive leaps; it has progressed because individual scientists incrementally understood more and more things, wrote down what they understood and why they understood it, and subjected their ideas to public criticism from other scientists. The important bit is all system 2.
It's the difference between learning things by experiment and learning them from a textbook. A research scientist learns by experiment; an engineer learns from a textbook -- there isn't time for him to learn everything by experiment, from scratch. One of the problems of the investment industry is that so many people are out there trying to come up with eccentric theories of their own. A good investor (and certainly a good wealth manager) needs to be like an engineer. Read the "text book" and apply it, that's my advice.
E=mc^2 is not a definition. Energy and mass are different concepts. Einstein's theory was an act of scientific modelling, not an act of grammar. Your "model" is an act of grammar. This is clear if we do a thought experiment. If I said to you, "X is a case of intuition", you might reply, "no, X is not sensory stimulus followed by interpretation and is therefore not the kind of intuition we are talking about here". If I said to Einstein, "heat is a form of energy that does not fit your theory", Einstein could not reply "oh, heat does not count as energy for the purposes of this paper". He would have to reply, "actually, that case does fit my theory".
Hello John,
Thank you for your considerate and thoughtful reply. Here are my thoughts to your points...
You wrote: "This will teach decisiveness — indeed, I learn decisiveness in life in general before I applied it to trading — but it will not give you intuitive expertise in a specific domain."
Life teaches much more than decisiveness, it also is a wonderful playground to deploy knowledge, memory, creativity, instinct, and intuition. In the traffic example I gave I used to tune into my intuition to anticipate whether the driver in front of me was going to change lanes, turn left, turn right, and so forth. This is excellent practice for intuition. Now that I live in New York the intuition game I play is to anticipate where the train doors will open on the platform so that I am assured of a seat on the rush hour train.
My overall point is that mastery is not just about grinding away the hours - 10,000 in your example - but also about paying attention to the world around us and seeing opportunity to practice using our minds to maximize the results of a chosen endeavor.
You wrote: "Re. analysis and creativity, I think we are talking at cross purposes here. Clearly it is useful for human beings to be creative in their analysis, and it is debatable how far that creativity belongs to system 1 or system 2. But investment decisions should be based on a model, not a gut feel: creativity is useful if it helps you build a better model."
First, I would argue, and have argued (see previous response and its references) that system 1 and system 2 are not what I am talking about here. So definitively, instinct and intuition are not the same thing. Also, creativity is super complex and not well understood by current neuroscience or current psychology, of which Kahneman is a practitioner. System 1 and system 2 do not adquately describe creativity either.
My own thought, based on my experience, is that creativity is a whole-brained activity and that it relies on knowledge to provide a grounds for interpretation of insight and as a reference for what kinds of questions need answering. But that there is an interaction with intuition that is the spark that provides the insight in the case of a truly original thought, and the connection in the case of a permutation of extant thought.
I agree with you half way that investment decisions should include modeling. In fact, I am on the record in my book The Intuitive Investor as saying that the ultimate goal is for every aspect of your mind to be exalted by the tools you use; and that the right brain, including creativity and intuition, are deeply neglected.
Regarding modeling...Facts by definition, are things that occurred in the past, but investing and its results unfold in the future. As you are building your model you may trust that past facts will repeat themselves going forward. An example of this kind of thinking is looking for "moats" around a business, or sustainable competitive advantage. This is another way of saying I am comfortable projecting past results into the future because revenues and earnings tend to be stable. But the operative word in "as you are building your model you may trust past facts will repeate themselves going forward" is trust. Trust is not a factual activity, but a leap of faith choice. Likewise, you may not trust that past facts will repeat themselves, instead preferring to predict that there will be a state change. Again, a leap of faith is called for to make this judgment.
So please tell me about the future facts of the market sans leaps of faith. Intuition is one of the tools in the toolkit and I have found it, as have many others, useful for understanding the future. That does not mean that it is easy. The task of charting out a course for the legitimacy of intuition is difficult (as all new endeavors are) because of the need for good nomenclature to allow for distinctions, and hence discussion and exploration, as well as skills that allow people to have valid experiences with the material.
You wrote: "I am not sure what you are saying here, but this is exactly the point I am making..."
I was responding to this from you: "There are such things — in particular, the subtleties of human social interactions, which we are all more-or-less naturally adept at understanding — but I do not think it is plausible that the relevant kinds of things exist in the financial markets. Human beings are naturally very bad at understanding financial markets!"
My point was that the science of the mind and its workings is very young and that I am willing to engage in these discussions as a way of moving the study of intuition forward. I think that the left brain and right brain working in concert are a potent combination, but that there is a gross imbalance given to left brain analytical thinking having nothing to do with the right brain's potency, but more with a lack of nomenclature to describe states of consciousness and skillset built around that consciousness. It will take a long time for this work to help us better understand human behavior, human choices, and hence financial markets. On the scale of the lifetime of a human being it may seem as if this takes forever, but on the scale of history it will happen rapidly.
You wrote: "I think perhaps you are thinking of science too much through the eyes of an individual scientist. Scientists may make “intuitive leaps” (really, an organisation of facts that takes some time to brew in the mind). But a “leap” can also be a leap into a precipice — it can be completely wrong. Our understanding of the cosmos has not progressed because we all have intuitive leaps; it has progressed because individual scientists incrementally understood more and more things, wrote down what they understood and why they understood it, and subjected their ideas to public criticism from other scientists. The important bit is all system 2."
I think of science as scientific method divorced from its modern scientism aspects. In other words, it is a logical system that naturally flows from its metaphysical assumptions. I also think that experiences not described by science remain valid while they await science's blessing. Scientists spent decades trying to prove that dogs think. Were dog owners waiting around impatiently for science to acknowledge every dog owner's experience with dogs? Hardly. I am hosting a discussion on intuition because I know that it is important; that it is distinct from instinct; that it is tricky to describe; and because there seems to be a convergence happening between physics, neuroscience, and psychology that can help inform the investment profession about this subject.
I very much like your description about the difference between the individual scientist, and science, as a whole. That is certainly an important distinction and you are right that I was more focused on the individual.
You said something interesting here when you said, "[science] has progressed because individual scientists incrementally understood more and more things, wrote down what they understood and why they understood it, and subjected their ideas to public criticism from other scientists." I could not agree with you more. I think intuition is a way of understanding the world, a sense, in fact, that is comparable to our other senses. Further, the process you describe is exactly why I am putting my thoughts in public and trying to advance the discussion.
I still disagree with you that system 1 and system 2 are all that is needed to describe our experience of mind.
You wrote: "A good investor (and certainly a good wealth manager) needs to be like an engineer. Read the “text book” and apply it, that’s my advice."
Thank you for sharing your point of view with me and the audience.
You wrote: "E=mc^2 is not a definition. Energy and mass are different concepts. Einstein’s theory was an act of scientific modelling, not an act of grammar. Your “model” is an act of grammar. This is clear if we do a thought experiment. If I said to you, “X is a case of intuition”, you might reply, “no, X is not sensory stimulus followed by interpretation and is therefore not the kind of intuition we are talking about here”. If I said to Einstein, “heat is a form of energy that does not fit your theory”, Einstein could not reply “oh, heat does not count as energy for the purposes of this paper”. He would have to reply, “actually, that case does fit my theory”."
First, in your thought experiment Einstein would have been the beneficiary of the fact that heat was already acknowledged as energy so his theory did not have to prove it was a form of energy, it simply needed to explain its equivalency with mass. In charting out intuition there are many that deny its existence so it is a bit tougher. Also, E=MC^2 is a definition. There are many sources that discuss this, but I refer you to "The Quantum World" by Ken Ford, retired director of The American Institute of Physics who describes (pp. 191-192) it: "Mass and energy, which prior to Einstein's work were thought to be distinct and unrelated concepts, are drawn together into a simple relation of proportionality by Einstein's equation." He also describes it as an equivalence (p. 17) with the speed of light simply being a scalar.
My definition of intuition is that it is a sense, so intuition = a sense. Yet, intuition, just like the other senses requires an interpretation, too. So for example, in acoustics they say that sound = disturbance of a medium by vibration with a listener. To an acoustics scientist the answer to the age old philosophical question, "If a tree falls in the forest and there is no one there to hear it, does it make a sound?" is "no, it does not make a sound because there is no listener." In intuition, if the interpretation is bungled then there is no intuition.
I think what you may be after is the mechanism by which intuition works. Because you deny its existence it seems to remain an abstract concept. But I do not want to put words in your mouth so please correct me. As for the mechanism by which it works. I think that quantum physics demonstrates that consciousness is a non-local wave phenomenon. I would characterize intuition as the sense that allows consciousness to attune with non-local waves.
Hope this helps with your understanding : )
Jason
This is interesting -- thank you for your response. I enjoyed your wry, "thank you for sharing...". I regret I do not have time to respond now. What brought me back was that I saw the following and it seemed obliquely relevant to our discussion.
http://www.bakadesuyo.com/2013/07/strokes-of-genius/
Hi John,
I actually meant what I wrote, "Thank you for sharing..." These discussions are useful for all that choose to participate in them. I will check out the link.
With smiles,
Jason