The power & perils of intuition

Below are excerpts from an interview of Daniel Kahneman and Gary Klein on the power & perils of intuition (Mckinsey Quarterly). You can read the full interview from here. I think the interview is as relevant for corporate personnel as it is for a stock researcher. Key points worth remembering are:

1. Don’t become overconfident: Look for information which does not support your thesis. If you’re starting with a hypothesis and planning to collect information to support the thesis, then you are doomed.

2. Learn the “The premortem technique”: It is a sneaky way to get people to do contrarian, devil’s advocate thinking without encountering resistance. Before a project starts, we should say, “We’re looking in a crystal ball, and this project has failed; it’s a fiasco. Now, everybody, take two minutes and write down all the reasons why you think the project failed.”. The logic is that instead of showing people that you are smart because you can come up with a good plan, you show you’re smart by thinking of insightful reasons why this project might go south. If you make it part of your corporate culture, then you create an interesting competition: “I want to come up with some possible problem that other people haven’t even thought of.” The whole dynamic changes from trying to avoid anything that might disrupt harmony to trying to surface potential problems.

3. Use “Checklists”: The checklist doesn’t guarantee that you won’t make errors when the situation is uncertain. But it may prevent you from being overconfident. The problem is that people don’t really like checklists; there’s resistance to them. So you have to turn them into a standard operating procedure—for example, at the stage of due diligence, when board members go through a checklist before they approve a decision. A checklist like that would be about process, not content. I don’t think you can have checklists and quality control all over the place, but in a few strategic environments, I think they are worth trying.

4. Avoid “Correlated errors”: There’s a classic experiment where you ask people to estimate how many coins there are in a transparent jar. When people do that independently, the accuracy of the judgment rises with the number of estimates, when they are averaged. But if people hear each other make estimates, the first one influences the second, which influences the third, and so on. That’s what I call a correlated error. Frankly, I’m surprised that when you have a reasonably well-informed group—say, they have read all the background materials—that it isn’t more common to begin by having everyone write their conclusions on a slip of paper. If you don’t do that, the discussion will create an enormous amount of conformity that reduces the quality of the judgment.

5. Postpone intuition as much as possible: Take the example of an acquisition. Ultimately, you are going to end up with a number—what the target company will cost you. If you get to specific numbers too early, you will anchor on those numbers, and they’ll get much more weight than they actually deserve. You do as much homework as possible beforehand so that the intuition is as informed as it can be.