The Intuitive Investor: A Simple Model of Intuition

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:

1. Ignored;
2. Obscured; and/or,
3. 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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