The good ol’ gut feeling

We sometimes tend to think that ideas and feelings arising from our intuition are essentially superior to those achieved by reason and logic.

As such, intuitionthe good old “gut feeling”—has come to be idealized as the Noble Savage of the mind, fearlessly cutting through the precision of reason.

In truth, intuition is just another heuristic of our brain honed—over millions of years—to ease the cognitive load of making a decision.  But it is not always good at it.

Let’s test your intuition with a question that Ludwig Wittgenstein used to pose to his students.

You have a ribbon, which you want to tie around the center of the Earth (assuming that the Earth is a perfect sphere for once).  Unfortunately, you’ve tied the ribbon a bit too loose; it’s a meter too long. Intuition Bias

Now, if you could distribute the resulting slack—the extra meter—evenly around the planet so that the ribbon hovered just above the surface, how far above the surface would it be?

Think about it for a while, but not too long, trust your intuition.

What’s your answer?

Do determine an answer before you commence reading.

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Most people’s intuitions lead them to an answer in the region of a tiny fraction of a millimeter.

Are you one of those “most people”?

The actual answer is 16 centimeters.

What?  Really?

Yes, really.

To save you the trouble of rummaging for your old mathematics formula collection, hereunder is the calculation, red on white, to prove the result:

Circumference of Earth                      40,075,000 m / (2 x 3.14159265359) = radius of 6,378,134.34 m

Circumference of Earth + 1 meter 40,075,001 m / (2 x 3.14159265359) = radius of 6,378,134.50 m

Hence, our human brain may be intrinsically limited in its ability to intuit certain things—like radiuses, quantum physics, and probability.

Yet decisions are always based on information that is incomplete, ambiguous, and changing.  We tend to make decisions with very little awareness, which can be quite dangerous.

Fortunately, the super-heroes from the field of Behavioral Finance have embarked on the venture to close that gap between how we actually make decisions and how we should make decisions.

Reading and familiarizing oneself with their work on those cognitive thinking errors, heuristics, and mental biases does not make all of one’s decisions perfect; nevertheless, awareness should at least increase the ratio of good decisions.  And good decisions in financial matters is the cornerstone of growing one’s nest egg.

So, let’s commit to make the best use of our uniqueness.  Way back when large brains evolved in primates, the increased memory capacity greatly enhanced our ability to make complex decisions, leading to longer sequences of actions to achieve goals—even long term goals.

This makes humans the most rational beings on the planet these days, but that’s not saying much, considering that the next most rational beings are chimpanzees.

As Daniel Gilbert said, “Human rationality is bounded, however, and as a result, people don’t make decisions based on optimal outcomes; they make choices based on what’s good enough.  People don’t maximize; they “satisfice.”

Be a maximizer and strive for the optimal outcome.

 

Disclaimer 1: I am not implying that intuitive decisions are inaccurate.  On the contrary, they can be quite accurate, but only in domains where one’s intuition has been carefully trained.  And that requires a predictable environment, where there is lots of repetition and quick feedback on one’s choices.  Like, say, for the experienced chess or football player, but clearly not for a novice in the stock market.

Intuition can be a good input for decision making, but that alone is not good enough. Intuition is a good start. Empiricism, logic and rational thinking are essential for important decisions.   And don’t let your intuition quietly slip to “into-wishing“.  But this, of course, isn’t intuitively obvious.

There are times that call for speed and gut-level thinking, others that call for caution.  It’s all about the fit, and the fact is we’re not all that good at fitting our thinking to the problem at hand.  In other words, thinking is messy.

Disclaimer 2: I am also not denying the fact that we do indeed have a second brain in our guts which performs an important role in managing the workings of our inner tube.  It is just not cut out to additionally perform rational decision making.  More about its magic workings here.

 

“An investment in knowledge always pays the best interest.” — Benjamin Franklin

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