Consider this problem. A bat and ball cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?
Obviously, the ball costs $0.10. Or does it? Our mind immediately jumps to this answer, as it did for more than half the Harvard, MIT, and Princeton students who were asked. But if we take a minute to work it out, we’ll come up with something different.
If the ball costs $0.10 and the bat costs a dollar more than the ball, then the bat costs $1.10 and the two together cost $1.20. So that can’t be right. No, the ball costs $0.05 and the bat costs $1.05 (a dollar more) and the two together cost $1.10.
In Thinking, Fast and Slow, Daniel Kahneman uses this (pp. 44-45) and dozens of other examples (and mounds of scientific research conducted over decades) to poke holes in the confidence we have in intuition–even the intuition of experts. Analysis of thousands of trades by fund managers showed they were as successful in picking stocks as dart-throwing monkeys would be. Despite the great confidence they have in their years of experience, they are merely as good as a random process for choosing stocks.
We use our intuition in voting for a president, in explaining why a golfer won (or lost) a tournament, in choosing a candidate for a job opening, in estimating the height of the tallest redwood, buying a car, estimating sales of our new product–and often we’d do just as well flipping a coin. Why is our fast analysis so often wrong? Why don’t we use a slower, more logical approach more often?
Intuition is not always wrong. It is an important feature of our brains that allows us to interact with our world effectively. If we had to slow down and analyze everything we encountered before we knew how to respond (every chair, every facial expression, every moving object on the highway), we’d be paralyzed.
Intuition is also effective for experienced experts in very narrowly constrained realms–anesthesiologists in operating rooms, firefighters in a burning building, chess masters in a tournament. But where there are many variables and many possibilities (such as financial advisors picking stocks or pundits predicting world events a year out), intuition is useless.
Too often, however, we rely on our hunches when we shouldn’t. That was the whole point of Moneyball, the bestseller about how the Oakland Athletics (one of the least wealthy teams in baseball) consistently outperformed much richer teams. The Athletics didn’t rely on how a player looked or talked or acted, as baseball scouts traditionally did. They looked at statistics–cold and hard. When they saw a player with good stats who was undervalued on the market, they snapped him up even if he was ugly, short, and fat.
Kahneman makes much the same point that Malcolm Gladwell does in Blink, which I reviewed here. But Kahneman does so with more clarity and care.
Thinking, Fast and Slow is especially worthwhile for people in business. Sales forecasts are often far too optimistic. Hiring is often too impressionistic. Business strategies are promoted with supreme confidence in bestselling books that we should be far more skeptical about. In Built to Last eighteen pairs of competing companies (one more successful than the other) were compared. But in the period following the publication of the book, the average difference in profitability fell to near zero.
Kahneman clearly shows a better way, in business and in life.