The Situationist

Archive for September 2nd, 2007

Gut Feelings

Posted by The Situationist Staff on September 2, 2007

Field of DreamsWe all experience them. They are known as “intincts,” “gut feelings” or “gut reactions,” and they comprise immediate intuitions and emotions that seem to operate outside our conscious reasoning process.

Gut feelings can get us to do many things. They can, for instance, lead us to believe in what appears otherwise. This was famously depicted in Field of Dreams, when Terrence Man (played by James Earl Jones) assured Ray Kinsella (played by Kevin Costner and on the verge of losing his farm) that “People will come Ray, They’ll come to Iowa for reasons they can’t even fathom. They’ll turn up your driveway, not knowing for sure why they’re doing it . . . Ohhhhhhhh, people will come, Ray. People will most definitely come.”

Gut feelings can also occasionally make headlines. This past July, for instance, Secretary of Homeland Security Michael Chertoff revealed that he had a “gut feeling” that the United States would face a heightened chance of a terrorist attack over the summer.

A leading expert on gut feelings is Gerd Gigerenzer, director of the Max Planck Institute for Human Development in Berlin and author of the new book “Gut Feelings: The Intelligence of the Unconscious.” Claudia Dreifus of the New York Times recently interviewed Gigerenzer and below we have excerpted portions of the interview.

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Q: O.K., let’s start with basics: what is a gut feeling?

A: It’s a judgment that is fast. It comes quickly into a person’s consciousness. The person doesn’t know why they have this feeling. Yet, this is strong enough to make an individual act on it. What a gut instinct is not is a calculation. You do not fully know where it comes from.

My research indicates that gut feelings are based on simple rules of thumb, what we psychologists term “heuristics.” These take advantage of certain capacities of the brain that have come down to us through time, experience and evolution. Gut instincts often rely on simple cues in the environment. In most situations, when people use their instincts, they are heeding these cues and ignoring other unnecessary information.

Q: In modern society, gut thinking has a bad reputation. Why is that?

A: It is not thought to be rational. One of the founders of your country, Benjamin Franklin, suggested to his nephew that when he made important life decisions, he should do it like a bookkeeper — list all the pros and cons and then make the decision, after weighing everything. That is the classical rational approach.Michael Chertoff Gut Feelings

Q: I make my decisions that way. What’s wrong with it?

A: In some situations, that demands too much information. Plus, it’s slow. When a person relies on their gut feelings and uses the instinctual rule of thumb “go with your first best feeling and ignore everything else,” it can permit them to outperform the most complex calculations.

Q: You are the author of a famous study on how people use instinct in investing. Why this topic?

A: Because intuition often underlies stock picking. Ordinary investors will frequently pick a company they’ve heard of before. We call this the “recognition heuristic,” and it basically means “go with what you know.” I was curious: is this effective? In the 1990s, we interviewed 360 pedestrians in Chicago and Munich. We asked if they were familiar with the names of German and American corporations traded on the stock exchange. Using the names of the most frequently recognized companies, we then made up investment portfolios.

After six months, the high-recognition portfolios, on average, gained more value than the Dow and DAX markets and some big-name mutual funds. The high-recognition portfolios did better than a portfolio we created from randomly picked stocks and another made up of low-recognition stocks. Over the years, we’ve repeated this experiment twice, in different ways. Each time, the intuitive wisdom of the semi-ignorant outperformed the calculations of the experts.

Q: Have you considered going to your pedestrians for investment advice?

A: Yes! I did that once. I invested $50,000 in high-recognition stocks picked by the least stock-savvy group we studied, those German pedestrians. Their portfolio went up 47 percent in six months, as opposed to the 34 percent gains made by the German stock market as a whole. This was during a bull market.

Q: Where can gut instincts fail?

A: Here’s an example: after 9/11, many Americans stopped traveling in airplanes and drove on highways instead. I looked at the data, and it turned out that in the year after the attacks, highway fatalities increased by an estimated 1,500 people. They had listened to their fear, and so more died on the road. These kinds of fatalities are easily avoided. But psychology is not taken very seriously by governments. Most of the research about how to combat terrorism is about technology and bureaucracy — homeland security. In this case, educating the public about their own gut reactions could have saved lives.

Q: Some of your critics say that gut instincts just aren’t scientific. What’s your answer?

A: We study these things, where intuition is good and where it’s not. One should also not overlook that in science itself, you need intuitions. All successful research scientists function, to a degree, on gut instincts. They must make leaps, whether they have all the data or not. And at a certain moment, having the data doesn’t help them, but they still must know what to do. That’s when instinct comes in.

Q: Do you think of yourself as intuitive or rational?

A: Both. In my scientific work, I have hunches. I can’t explain always why I think a certain path is the right way, but I need to trust it and go ahead. I also have the ability to check these hunches and find out what they are about. That’s the science part. Now, in private life, I rely on instinct. For instance, when I first met my wife, I didn’t do computations. Nor did she.

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For the rest of the interview, click here. For a recent BBC story on a study conducted at University College London on how snap decisions are “often correct,” click here.

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