Trust Your Gut - Southeastern Homepageshomepages.se.edu/.../files/2012/12/Dont-Trust-Your-Gut.pdf · 2012. 12. 20. · Trust Your Gut by Eric Bonabeau Intuition plays an important

FRONTIERS

Trust Your Gutby Eric Bonabeau

Intuition plays an important role in decision making,

but it can be dangerously unreliable in complicated

situations. A new set of analytical tools can help you

leverage your instinct without being sabotaged by

its weaknesses.

MlAKINC HIGH-STAKES

decisions has always beenhard. But in recent decades,

as the complexities of global commercehave deepened, it's become tougher thanever. The choices facing managers andthe data requiring analysis have multi-plied even as the time for analyzingthem has shrunk.

One decision-making tool - humanintuition-seems to offer a reliable alter-native to painstaking fact gatheringand analysis. Encouraged by scientificresearch on intuition, top managers feelincreasingly confident that, when facedwith complicated choices, they can justtrust their gut Indeed, a survey that wasconducted in May 2002 by executivesearch firm Christian & Timbers reveals

that fully 45% of corporate executivesnow rely more on instinct than on factsand figures in ninning their businesses.Decision-making consultant Gary Klein,in his hook Intuition at Work, expressesthe common wisdom when he says thatintuition is "at the center of the decision-making process" and that analysis is, atbest, "a supporting tool for making in-tuitive decisions."

The trust in intuition is understand-able. People have always sought to puttheir faith in mystical forces when con-fronted with earthly confusion. But it'salso dangerous. Intuition has its placein decision making-you should not ig-nore your instincts any more than youshould ignore your conscience-but any-one who thinks that intuition is a substi-

116 HARVARD BUSINESS REVIEW

tute for reason is indulging in a riskydelusion. Detached from rigorous analy-sis, intuition is a fickle and undepend-able guide-it is as likely to lead to disas-ter as to success. And while some haveargued that intuition becomes morevaluable in highly complex and change-able environments, the opposite is ac-tually true. The more options you haveto evaluate, the more data you have toweigh, and the more unprecedented thechallenges you face, the less you shouldrely on instinct and the more on reasonand analysis.

That brings us back to the essentialconundrum facing today's harried ex-ecutive: How do you analyze more inless time? The answer may lie, it nowappears, in technology. Powerful new

decision-support tools can help execu-tives quickly sort through vast numbersof alternatives and pick the best ones.When combined with the experience,insight, and analytical skills of a goodmanagement team, these tools offercompanies a way to make consistentlysound and rational choices even in theface of bewildering complexity-a capa-bility that intuition will never match.

Intuition's AllureThe stories are certainly seductive. FredSmith has an insight into the transportbusiness and, despite widespread skep-ticism, goes on to create Federal Express.Michael Eisner hears a pitch for an off-beat game show and, knowing in hisheart it's going to be a blockbuster, im-

mediately commits millions to devel-oping Who Wants to Be a Millionaire?George Soros senses in his bones a bigshift in currency markets and, acting onthat hunch, makes a billion-dollar kill-ing. Robert Pittman has a vision of thefuture of on-line media while taking ashower and rushes to lead America On-line in an entirely new direction.

The reason such tales (whether apoc-ryphal or not) have become businesslegends is that we want to believe in thetransformative power of intuition. Forone thing, it's romantic. It raises busi-ness above the drab world of spread-sheets and income statements and tumsit into something of an art form. The ex-ecutive office becomes a place of inspi-ration and vision rather than planning

MAY 2003 117

FRONTIERS • Don't Trust Your Cut

and number crunching. For another, itsimplifies, lt says that we needn't worryif we can't decipher complex challengesrationally-our subconscious mind willautomatically deliver the right answer.We just need to relax, close our eyes,and let the magic happen.

Finally, it makes us feel special. Anyidiot can run the numbers, but the giftof a good gut - that's reserved for thetrue business elite. T\vo years ago inthese pages, Johnson & Johnson CEORalph Larsen gave voice to this com-mon, if unproven, assumption: "Veryoften, people will do a brilliant job upthrough the middle management lev-els, where it's very heavily quantitativein terms of the decision-making. Butthen they reach senior management,where the problems get more complexand ambiguous, and we discover thattheir Judgment or intuition is not whatit should be." What better way to Justifya high status-and a huge salary-thanto claim the superhuman power of ex-ceptional instinct.

But our desire to believe in the wis-dom of intuition blinds us to the less ro-mantic realities of business decisionmaking. We remember the examples ofhunches that pay off but convenientlyforget all the ones that tum out badly.FedEx's Fred Smith also launched Zap-Mail, a proprietary network for faxtransmissions that bombed. Michael Eis-ner was responsible for the debacle ofthe EuroDisney opening, not to men-tion recent box-office turkeys The Coun-try Bears and Treasure Planet. GeorgeSoros lost a fortune speculating in Rus-sian securities in the late 1990s and thenpromptly lost another one betting ontech stocks in 2000. And as for AOL'sPittman, his instinctive belief that thecompany's future lay in advertisingrather than subscriptions now appearsto be less a brilliant insight than a bril-liant mistake - and one of the reasonshe's no longer employed at AOL. The

Eric Bonabeau, a frequent contributorto HBR, is the chief scientist ofJcosystem,a strategy consulting firm in Cambridge,Massachusetts. Bonabeau can be reachedat [email protected].

unhappy fact that we'd prefer not toadmit to ourselves is this: For every ex-ample of a great gut decision, there'san equal and opposite example of a ter-rible one.

Our Untrustworthy GutCritiques of intuition are complicatedby the fact that "intuition" is such aslippery word. Its definition can bestretched to mean almost anything,from innate instinct to professionalJudgment to plain-old common sense.But people generally agree that intu-ition refers to the brain's process of in-terpreting and reaching conclusionsabout phenomena without resorting toconscious thought. And further, it's usu-ally assumed that this process drawson the mind's vast storehouse of mem-ories. Bruce Henderson, founder of theBoston Consulting Group, may have putit best when, in 1977, he called intuition"the subconscious integration of all theexperiences, conditioning, and knowl-edge of a lifetime, including the culturaland emotional biases of that lifetime."

It's certainly true that the mind is amarvelous processor of information -we would be lost in the world withoutits hidden stream of calculations. Butit's also true, as Henderson intimated,that it's an imperfect processor. Scholarsof human cognition have shown thatour thinking is subject to all sorts ofbiases and fiaws, most of which operateat a subconscious level - at the level, inother words, of intuition. We naturallygive more weight to information thatconfirms our assumptions and preju-dices, for example, while dismissinginformation that would call them intoquestion. We're also creatures of the sta-tus quo, drawn to conclusions that jus-tify and perpetuate current conditionsand repelled by anything that would roilthe waters. 7\nd we're irrationally infiu-enced by the first information we re-ceive on a particular subject-it becomes,as decision researchers put it, the "an-chor" that determines and distorts howwe process all subsequent data.

The most dangerous of these flaws,when it comes to intuition, is our deep-seated need to see patterns. The mind's

well-documented facility for patternrecognition seems to lie at the very coreof intuition - it's how the brain synthe-sizes information from the past and usesit to understand the present and antic-ipate the future. But it can get us intotrouble. Reseaixhers have shown thatour unconscious desire to identify pat-terns is so strong that we routinely per-ceive them where they don't in factexist. When confronted with a new phe-nomenon, our brains try to categorizeit based on our previous experiences,to fit it into one of the patterns storedin our memories. The problem is that, inmaking that fit, we inevitably filter outthe very things that make the new phe-nomenon new - we rush to recycle thereactions and solutions from the past

That instinct, seemingly hardwiredinto our thinking by evolution, is ex-tremely useful in life-or-death situationswhere fine distinctions are irrelevant.If you were a caveman and had seenstrange animals maul other cavemen inthe past, then it would probably be wisefor you to flee from any strange animalyou happened to come across - even ifyou'd never seen the beast before. Thebenefit of a careful analysis of the situ-ation would be far outweighed by therisk of inaction. But managers are notcavemen. In complex business situa-tions, fine distinctions do matter-often,they're precisely what separates successfrom failure. If you try to interpret acompetitive threat or market upheavalby simply squeezing it into an old pat-tem, you're likely to miss what makesit different-and take the wrong action.Intuition is a means not of assessingcomplexity but of ignoring it. That'svaluable if you're a firefighter in a bum-ing building or a soldier on a battlefield.It's not valuable if you're an executivefaced with a pressing decision about in-vesting millions in a new product for arapidly changing market.

The more complex the situation, themore misleading intuition becomes. Ina truly chaotic environment - wherecause and effect no longer have a linearrelationship - the last thing you wantto do is try to apply pattems to it. Theessence of such an environment is the

l lS HARVARD BUSINESS REVIEW

Don't Trust Your Cut • FRONTIERS

The instinctive rush to apply a pattern to

a phenomenon can cut off or narrow an

individual's or a group's thinking too quickly.

lack of any discernible pattem in its evo-lution. In his McKinsey Quarterly article"On the Origin of Strategies," consultantEric Beinhocker put it this way: "Theproperties of complex adaptive systemspresent particular challenges to the de-velopment of business strategy becausepeople have a natural tendency to lookfor pattems. Indeed, the human driveto find pattems is so strong that theyare often read into perfectly randomdata. Moreover, human beings like toassume that cause directly precedes ef-fect, which makes it difficult to antic-ipate the second-, third-, and fourth-order effects of path dependence."If youmake an intuitive decision that tumsout well in such a situation, it's becauseyou're lucky, not gifted. And sooner orlater - probably sooner - your luck isgoing to run out. Just ask your averageday trader.

The Instinctive msh to apply a pat-tern to a phenomenon can also cut offor narrow an individual's or a group'sthinking too quickly. Impatient withambiguity, the mind naturally seeks clo-sure-that seems, in fact, to be one of themain functions of intuition-but an in-telligent decision-making process oftenrequires the sustained exploration ofmany alternatives. You want to keep theprocess open as long as possible beforeconverging on a final choice. That's hardto do when your gut - or your boss'sgut-is giving you The Answer.

Intuition presents another, even moreinsidious problem: It masks me-toothinking. We like to assume that our in-tuition is uniquely our own, a distilla-tion of our particular experiences and

insights. But while that mayhave been true a centuryago, when people led verydifferent lives dependingon where they lived andwhat they did, it's no longer

the case. In today's global village, withits instantaneous and unceasing com-munications, human existence has be-come homogenized-we share the sameexperiences, the same opinions, even thesame thoughts. We live in a vast echochamber, and the voice of intuition wehear inside our heads is increasinglythe same voice that speaks to everyoneelse. If, in making business decisions, weblindly follow its counsel, we'll end upmimicking our competitors rather thancreating strategies that distinguish usand bring us profits.

Expanding the MindSo, if we can't rely on our intuition buthave neither the time nor the mental ca-pacity to carefully analyze all the facetsof a complex situation, how in the worldcan we make smart choices? Technol-ogy may hold the key. Sophisticatedcomputer programs are now being de-veloped that can supplement and bol-ster people's decision-making skills.Many of these new decision-supporttools are still in the early stages of de-velopment and have yet to be appliedto strategic business decisions. But theyhold enormous potential for helpingexecutives carry out the two key com-ponents of decision-making or problem-solving exercises: searching for possiblesolutions and eva/uaf/n^ those solutionsin order to choose the best one or ones.The more complex and fast-changingthe situation, the more challenging bothsearch and evaluation become. By ex-panding the analytical as well as the in-tuitive capabilities of the mind, the newprograms allow a much faster, a much

fuller, and a much more rigorous explo-ration of the options. (See the sidebar"Search and Evaluate" for an overviewof traditional and emerging decision-support tools.)

Decision Sciences. The traditionaltools of decision sciences - system dy-namics, decision trees, real options, port-folio management, and so on - con-stitute an important class of rationaldecision-making techniques that can beinvaluable when you're faced with lotsof options. They often lead to muchmore dependable decisions than doesinstinct alone. But they have their lim-its. Their workings are often so mysteri-ous to executives that they can seem likeblack boxes. And in highly complex sit-uations - when there are many depen-dencies among possible solutions or noclear way of measuring the solutions'value - traditional tools become un-wieldy and tend to provide unreliableanswers.

To use decision trees in the pharma-ceutical industry, for example, you haveto assume you know a drug's commer-cial value ten years before it hits themarket. And decision trees and otherdecision-science tools can't adequatelyaccount for emergent phenomena orchance events, such as the discovery thata dmg developed for one disease canbe used to treat another, very differentdisease.

Agent-Based Modeling. Isaac New-ton, after losing his savings in the SouthSea Bubble of 1720, bemoaned the factthat "I can calculate the motions of theheavenly bodies, but not the madnessof people." Many managers today arein the same quandary as Newton wasalmost 300 years ago. They have tomake decisions about complex systemswith many interrelated, yet unpredict-able, elements. Global markets, large or-ganizations, supply chains, technology

MAY 2003 119

FRONTIERS • Don't Trust Your Cut

networks-all can seem impenetrable totraditional forms of analysis.

But agent-based modeling can shedlight on the workings and evolution ofsuch systems. In an agent-based simula-tion, a computer creates thousands, evenmillions, of individual actors; each ofthese virtual agents makes decisions,providing an accurate model of a com-plex system's dynamics. Agent-basedmodeling allows you, literally, to do whatNewton couldn't: predict the madnessof crowds. (For more on agent-basedmodeling, see my HBR article "Predict-ing the Unpredictable," March 2002.)

Southwest Airlines is using an agent-based model to revamp its rules for han-dling cargo, reaping $2 million in an-nual labor savings in the process. EliLilly is using one to model early-phasedrug development, leading to the crea-tion of organizational fomis that prom-ise to boost productivity and enhancespeed. Pacific Gas and Electric is usingan agent-based model to better managethe flow of electrons through its vastpower grid, saving money and avoidingservice disruptions.

In the coming years, agent-basedmodels will no doubt be used to gener-ate scenarios for the evolution of mar-kets and competition, the dynamics ofwhich hinge on the decisions made bymany players. These scenarios can be-come the basis for evaluating a multi-tude of strategic and tactical options -and they can be used to put executives'intuitive choices to the test.

For Further Reading

Alden M. Hayashi's"When to TrustYour Cut" (HBR, February 2001, ReprintR0102C) provides a lucid overview ofcurrent thinking on how intuition works.

David C. Myer's Intuition: Its Powers ondPerils (Yale University Press, 2002) offersa lively and thorough review of the pow-ers and pitfalls of gut instinct.

Fora good introduction to the uncon-scious biases in our thinking, see John S.Hammond III, Ralph L. Keeney, andHoward Raiffa's'The Hidden Traps inDecision Making"{HBR, September-October 1998, Reprint 98505)-

Artificial Evolution. The best systemever devised for making choices froman almost infinite set of altematives isevolution itself. The basic process of evo-lution-taking the best-available optionsand then combining and mutating themto create even better ones-is now beingincorporated into a type of analyticalsoftware known as artificial evolution,or evolutionary computation. This tech-nology uses the computational powerof computers to both search out a vastnumber of solutions and evaluate them.

To see how it works, imagine that youmn a factory and have to detennine theproduction schedule that will maximizethe plant's output within a given period.You start by randomly generating somealternative schedules - their quality

success become more complex and sub-jective. You can't Just run the numbers;you have to incorporate the expertise.Judgment, and, yes, intuition of sea-soned professionals. You have to bringpeople into the evaluation stage of thedecision-making process. That can beaccomplished with interactive evolu-tion, a variation of artificial evolution.The basic difference is that a person orgroup of people, rather than a computer,judges each generation of attematives.

One major automobile manufactureris using interactive evolution to aid innew-car design. That process is highlycomplex because car designers have tosatisfy hundreds of technical constraints,such as wheelbase length, windshieldangle, and engine compartment size.

The best system ever devised for making choices from

an almost infinite set of alternatives is evolution itself

makes no difference at this point-andfeeding them into artificial-evolutionsoftware. The software evaluates howwell each schedule performs in maxi-mizing output, picks the few that per-form best, and randomly pairs them for"mating."The resulting large set of alter-native schedules combines the charac-teristics of the prior generation whileintroducing some random character-istics as mutations. It searches out, inother words, a large new set of possiblesolutions. The software evaluates the so-lutions, and the ones that perfonn bestin maximizing output are selected foranother round of mating. As more andmore generations go by-and computerscan crank through the process in min-utes - the resulting schedules becomebetter and better. John Deere alreadyuses this kind of system to help opti-mize its manufacturing operations, andMexican cement producer Cemex usesa similar system to route its trucks.

Interactive Evolution. In the plant-scheduling example, altematives couldbe judged with an objective measure -factory output. As decisions becomemore strategic, however, the criteria for

while also being creative in both engi-neering and aesthetics. When designershave to do this without the help of tech-nology, it is extraordinarily time con-suming. They have to test every deci-sion against all sorts of variables, and asa result they can consider only a smallset of options. But interactive-evolutionsoftware can pump out iterations of newdesigns very quickly. The designers ex-amine each set of alternatives and, usingsubjective aesthetic judgments in addi-tion to the computer's objective mea-sures, choose the best ones for the nextround of mating.

Other companies, like Procter &Gamble and Pepsi-Cola North America,are using interactive evolution to createnew product and packaging designs -but they're using customers rather thanemployees to pick out the best optionsfrom each generation. One can easilyimagine a similar process for high-levelstrategic decisions that leverages the in-sights of an executive team to continu-ously refine plans.

Open-Ended Search. Artificial andinteractive evolution are both optimi-zation processes. Alternative designs are

120 HARVARD BUSINESS REVIEW

Don't Trust Your Cut • FRONTIERS

Search and EvaluateMaking a decision or solving a problem entails two tasks.

First, you have to search for potential solutions (a task that in-

cludes framing the problem and establishing a set of working

assumptions about it). Second, you have to evaluate the solu-

tions and choose one. Each of these tasks is subject to varying

levels of complexity. If, for example, a problem has only a few

solutions but each solution has myriad consequences, the

search will be relatively simple but the evaluation will be ex-

tremely complex. The small figure below provides a simple,

but useful, grid for categorizing problems according to the de-

gree of complexity (for a human being) of the search and the

evaluation tasks.

n.Eo

c uO

few options,complex consequences

few options,simple consequences

many options,complex consequences

many options,simple consequences

Simple Complex

Search

The more complex the search or the evaluation, the more

difficult it becomes fora person to carry itout-the required

computations outstrip the mind's processing capabilities. In

such cases,some people will mistakenly rely on their intuition

to simplify their choices; they'll narrow their options or make

a choice based on their gut. But intuition is particularly un-

reliable in complex situations. A much better approach, when

you're faced with a complex search or evaluation, is to sup-

plement the mind's analytical and intuitive capabilities with

a computational decision-support tool.

The large figure categorizes both traditional and emerging

decision-support methods and tools in terms of how they

apply to different situations. There are many such tools, rang-

ing from real options to visualization software, in common

usetoday. Most traditional tools (indicated by blue type) have

limited applicability in highly complex situations; they're best

applied to problems that fall into or near the lower-left quad-

rant-those requiring relatively simple searches and evalua-

tions. As we move outward on the complexity scale, we need

to look to new, computer-based computational tools, such as

open-ended search (when there are lots of potential solu-

tions), agent-based modeling (when the consequences re-

quiring evaluation are complex) or artificial evolution (when

both search and evaluation are highly complex).

_2LU

?ssi

ng)

Com

plex

^mpu

ter

Pro

c

y.

O l

Sim

ple

jma

n P

roce

ss

X

agent-based modeling

decision sciences(trees, real options, etc.)

simulation modeling

spreadsheet modeling niock markets

advocacy

scenarioplanning

design

consultantsbehavioralobservation

gut decisions

optimization

interactiveevolutionby consumers

interactiveevolutionby experts

data mining

open-endedartificialevolution

interactiveopen-endedsearch

Simple(Human Processing)

Complex(Computer Processing)

Search

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generated by varying a small set of pa-rameters, and those designs are evalu-ated against a set of criteria-objective,subjective, or both. But sometimes youdon't know which parameters to use togenerate altematives, or the number ofparameters is so large that it's impossi-ble to reliably sample the entire set ofpossible solutions. In such cases, anothernew computational technique - open-ended search, or evolutionary design -can be applied to sort through and togenerate options. As its name implies,open-ended search focuses on the initialsearch for options rather than on theirsubsequent evaluation. It has enormouspotential for helping managers make

that replicate the functionality of othercircuits without infringing on existingpatents-a development that could, forbetter or worse, revolutionize the micro-chip industry.

My fimi, Icosystem, has begun help-ing a major petrochemical company useopen-ended search to evaluate pricingstrategies for one of its most importantproducts. The product's pricing has totake into account many factors. Theseinclude upstream commodity prices,downstream finished-product prices,demand at various stages in the valuechain, currency fluctuations, and com-petitor prices, all of which can changerapidly and unpredictably. As with the

New decision-support tools don't eliminate

human intuition; they harness its power while

remedying its most pernicious flaws.

decisions in highly complex situationshecause it offers a way to generate op-tions that would be invisible to even themost capacious mind.

Stanford professor John Koza has de-veloped a type of open-ended search,called genetic programming, for use increating electronic circuits. The numberof possible circuits is huge, and it's im-possible to characterize all of them withjust a few parameters. Using a smallnumber of parameters (which is all themind can handle) restricts the search toa tiny, predefined subset of circuits, pre-cluding truly creative solutions fromemerging. Genetic programming, by con-trast, "dis-integrates" circuits into theircomponent building blocks - diodes,amplifiers, resistors, and so forth-thenuses a computer to breed alternative cir-cuits by combining and recombining thecomponents.

The process has generated radicallynew designs - ones that would neverhave been discovered by simply judgingcomplete circuits against traditionalperformance criteria. Koza and his col-leagues at Genetic Programming in LosAltos, California, have recently beenusing the technique to create circuits

electronic-circuit example, the open-ended design begins with the disaggre-gation of an initial group of pricingstrategies (which the company collectsfrom various pricing experts) into theircomponent parts. In this particular case,the parts take the form of pricing rules,as follows: "If volume is > lOO, thenprice = x" for instance; or, "If winter iscold, price decreases."

To this primordial soup are addedrandom ruies - some of which directlycontradict the experts' rules - to addgreater genetic diversity to the mix. Acomputer creates random combinationsof the rules to produce a new set ofstrategies for testing, ln this way, thecomputer can quickly explore millionsof combinations, producing innovativestrategies that go well beyond anythingthat might have come out of the con-scious or subconscious minds of eventhe sawiest marketers. And, again, it'seasy to see how open-ended searchcould be applied to complex strategicchallenges that have many possible so-lutions. Just as with interactive evolu-tion, people can aid in the evaluation ofthe options generated by open-endedsearch. The technique offers a rational

HARVARD BUSINESS REVIEW

way for managers to approach the mostdifficult business problems: those thathave unbounded options with no well-defined criteria for success.

Beyond IntuitionThese new decision-support tools don'teliminate human intuition; they har-ness its power while remedying its mostpernicious fiaws. The instincts of smartexecutives and other professionals areincorporated into the process - they'reused either to generate initial options orto aid in judging computer-generatedones. But these instincts are subjected tothe rigors of analysis and at the sametime freed from the brain's constraintsin imagining possible solutions. Com-puters impose left-brain discipline onright-brain hunches-in a way that's wellbeyond the computational capacity ofthe human mind. Intuition is thus al-lowed to inform decision making with-out short-circuiting or otherwise con-straining it.

But there's more to it than that. Ulti-mately, computers may not just amplifythe mind's analytical capabilities; theymay expand its creative potential aswell. And they may allow us to breakthrough the interpretation barrier-ourdemand that our creations be intelligi-ble to us.

Think about it. When we create de-signs, whether for products or strategies,we are limited by our ability to under-stand those designs - their workingsmust be transparent to us. But if we lookat nature, we quickly find that some ofits greatest creations are opaque-theylie beyond our understanding. That'strue of the human mind itself, perhapsthe greatest creation of all. We don'tknow how it works; we j ust know that itworks extraordinarily well. Techniqueslike artificial evolution and open-endeddesign can also generate designs thatwe can't explain but that produce re-sults beyond even the limits of our imag-inations. They offer, it might be said,the true fulfillment of the promise ofhuman intuition. ^

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