The Limits of Going with Your Gut
Harnessing the Power of Counterintuition
By Michael J. Mauboussin
Harvard Business Press; 208 pp.; $29.95 Among the most galling aspects of the financial crisis is that intelligent people made so many decisions that later seemed obviously, pathetically wrong. Greed, and even a certain mean-spiritedness, were evident in the choices bankers, mortgage brokers, appraisers, and many others made. But maybe the most important failure was cognitive: People thought about risks and consequences (if they did at all) the wrong way. That's what Michael J. Mauboussin argues in Think Twice: Harnessing the Power of Counterintuition. As he writes: "To make good decisions, you frequently must think twice—and that's something our minds would rather not do." Reality is complex; our repertoire limited.
Explaining how our brains work is a topic of enduring interest, and in recent years it has become a preoccupation among economists and investors. Mauboussin, the chief investment strategist at Legg Mason Capital Management, has written a book for the rest of us, one that has a light touch but is still substantial.
So what causes us to make such dumb, hugely consequential mistakes? We're born that way, says Mauboussin. Drawing on research from psychologists, political scientists, and economists, he details eight of the most common mistakes we make. One is the tendency to misjudge behavior, especially our own; another is the confounding of cause and effect. My favorite describes the dangers of looking for answers in all the wrong places. These categories are less distinct than one might wish, but each chapter contains useful lessons and advice about how we can outsmart ourselves.
The title, Think Twice, surely was intended to play off Malcolm Gladwell's best-selling Blink, about rapid cognition, or decisions made in the blink of an eye. Yet Mauboussin doesn't make too much of this. A section called "Trust Your Blink Only If You Practice Blinking" offers the gentlest of rebukes, followed by some sharp analysis. In one recent study, Mauboussin notes, half of 1,000 top executives surveyed said they rely on intuition to make decisions. But intuition only works well in "stable environments, where conditions remain largely unchanged, where feedback is clear, and where cause-and-effect relationships are linear," Mauboussin contends. To clarify, he introduces the ideas of psychologist and Nobel Prize winner Daniel Kahneman, who described two systems of decision-making. The first is experiential: It's fast, automatic, and difficult to control. The second is analytical: It's slower, serial, and takes effort. Mauboussin says we can try to train our gut to produce more reliable responses. But it's better, he suggests, simply to recognize the limits of intuition.
Further along, the author brings a different perspective to the complexities that underlie our choices. Most of us have a deep desire to understand cause and effect—leading us to draw conclusions that only appear logical. We think we can make sense of an ant colony by watching what one ant does. Mauboussin cites a study by Harvard Business School that monitored the performance of 1,000 acclaimed equity analysts over a decade as they were lured to other firms. Guess what? They didn't do nearly as well in their new jobs. Mauboussin points out that while these stars had considerable skill, some of their success hinged on the workplace itself. The resources and reputation of a company, the relationships within, the flow of information—all of these affect how even the most talented among us perform.
The challenge is to resist our inclination to draw simple and lasting conclusions from dynamic situations. Mauboussin calls this the halo effect, or "the human proclivity to make specific inferences based on general impressions." Consider the many management consultants—O.K., and a lot of journalists, too—who mistake circumstance, fortunate or not, for talent or the lack thereof. "We tend to observe financially successful companies and attach attributes (for example, great leadership, visionary strategy, tight financial controls) to that success, and recommend that others embrace the attributes to achieve their own success." We're just deluding ourselves, he says. Success comes about by some mysterious commingling of skill and luck. If you don't believe that, think again.