The Business Case Against Gut Decisions

What business leaders can learn from chess players and firefighters about when to rely on intuition

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When it comes to big strategic decisions, even the best and most celebrated leaders have their share of failures. Think, for instance, of Steve Jobs launching the Apple Lisa. Or Jeff Bezos pushing the Fire Phone. Or (although the jury is still out) of Jeffrey Katzenberg and Meg Whitman launching Quibi, the streaming platform that’s off to a disappointing start.

For the former CEO of Quaker Oats, William Smithburg, that major failure of business strategy occurred in 1994. At the time, Quaker Oats, then a prosperous, independent company, outbid several other prospective buyers to acquire Snapple, a brand of tea-based drinks. The price: $1.7 billion. Smithburg was sure that this high price was justified by massive synergies. He had acquired Gatorade a decade earlier and made it into a superstar brand, and he was confident that Quaker could use its marketing power to repeat this feat with Snapple.

The acquisition turned out to be disastrous. Three years later, Quaker resold Snapple for less than one-fifth of the price it had paid. The mistake cost Smithburg his job. Among investment bankers, to call a deal “a Snapple” has become shorthand for a gross strategic mistake. Yet Smithburg, one of the most experienced and admired executives in his industry, had been confident in his intuition.

Most bad strategic bets have one thing in common: Whether they call it “gut feeling,” “business instinct,” or “vision,” most executives don’t hesitate to affirm that they rely on their intuition to make strategic decisions. Of course, not all bets can succeed, and not all ventures that failed were bad decisions. But in situations of great uncertainty, leaders determine that they must use their intuition. When we read the stories of successful entrepreneurs, outstanding CEOs, or great political leaders, they are much more likely to be celebrated for their vision and intuition than for their rationality or discipline.

The reality is that while intuition does play an important role in our decisions, we have to learn to tame and direct it. We need to know when it helps us and when it leads us astray. And we should admit that when it comes to strategic decisions, it is, unfortunately, a poor guide.

When you should — and shouldn’t — trust your gut

When, then, can we trust our intuition? At its core, our intuition is nothing but the recognition of situations that we have experienced before. Researchers Gary Klein and Daniel Kahneman, who did multiple studies on this topic, found that we should trust our intuition only when two conditions are met. First, when there’s an environment of “high validity,” in which the same causes generally tend to produce the same effects. And second, when we have had “adequate opportunities for learning the environment” through “prolonged practice and feedback that is both rapid and unequivocal.” In other words, we should trust it when such situations can truly be recognized, and when we have truly learned the right responses to them.

As surprising as it may seem at first glance, firefighters or intensive care unit nurses, for instance, work in relatively high-validity environments. This does not mean that the environment is without uncertainty or risk. It means that the environment provides valid cues about a situation. Observing buildings on fire or emergency room patients provides reliable information about what will soon happen to them. Firefighters and nurses who have observed them for years, and who have seen what happened immediately after the fire or the emergency, have learned many lessons — more, perhaps, than they consciously realize. The same is true of test pilots, chess players, or even accountants: These are regular environments, providing quick and unambiguous feedback about the quality of most (if not all) decisions. In these environments, learning is possible.

In fields of extremely low validity, the intuition of experts is totally worthless.

Perhaps the most extreme case of an area in which expertise cannot develop is the challenge of forecasting political, strategic, and economic events. Psychologist Philip E. Tetlock compiled forecasts made by almost 300 experts on political and economic trends over a 20-year period — 82,361 forecasts in all. He then evaluated each prediction: When a pundit had predicted a recession, did it happen? When a political commentator had foreseen an electoral landslide, did it take place? Tetlock concluded that forecasts by experts were less good than if they had answered at random, and less good than those of amateurs who were asked the same questions. In these fields of extremely low validity, the intuition of experts is totally worthless.

The practical question then becomes: In which category do our decisions fall? When making business decisions, should we rely on our intuition, as firefighters and chess players do, or try to keep it at bay, as psychiatrists and traders should?

Unfortunately, there is no hard-and-fast rule. There is no such thing as general purpose intuition. There are situations in which intuition is useful for making management decisions, but that can only be true if we’ve encountered a sufficient number of similar situations to develop real expertise. In reality, this is not often the case.

The challenge of making strategic decisions

One defining characteristic of big strategic decisions is that they are relatively rare and often unique. There is typically little chance that an executive facing a strategic decision has made many decisions of the same type in the past. When you embark on a radical restructuring, launch a breakthrough innovation, or attempt an acquisition that will change your company’s course, these are often things you have not done before. Sometimes, it is easy to overestimate the true relevance of your limited experience.

Except for some undisputed successes or egregious mistakes, feedback on your past strategic decisions is seldom unambiguous and never quick.

When William Smithburg acquired Snapple, his intuition was based on a single experience: the acquisition and subsequent success of Gatorade. It was tempting to see the Gatorade acquisition as a successful case that would be easy to replicate. But unlike Gatorade, when Snapple was purchased by Quaker, it was already losing market share. Its distribution model was very different from Quaker’s, and the production methods for tea-based drinks were also different from those Quaker knew. Snapple’s brand positioning as a natural, slightly offbeat product was difficult for a corporation like Quaker to maintain. For an outside observer, all these differences with Gatorade were significant. But Smithburg, confident in his intuition, only saw the similarities.

Another essential characteristic of big strategic decisions is that they aim to shape the long-term trajectory of the company as a whole. This makes their effects difficult to read. The results you see are not simply the effects of your strategic decisions. They combine with countless other effects — economic downturns and upturns, new market trends, unforeseen competitive moves, and so on. Except for some undisputed successes or egregious mistakes, feedback on your past strategic decisions is seldom unambiguous and never quick. In other words, even if you do have experience with strategic decisions, this experience does not allow for real learning.

Many truly big strategic decisions take place in a low-validity environment, in which the decision-makers have had limited practice, with delayed, unclear feedback. If we searched for a textbook example of conditions in which expert intuition cannot develop, we couldn’t find a better one.

Yet most executives give credence to their “gut feeling” when making a strategic decision. For many of us, particularly if we have been successful before, the intensity of our subjective belief is our compass: When you have any doubts, you hold back, but when you’re really sure, you go for it. When we do this, we forget that the CEOs, statisticians, and traders who were led astray by their intuition also had great confidence in their gut feelings, and that, in general, our confidence in our own judgment is almost always too great.

A wise leader, then, does not see herself as someone who simply makes sound decisions; because she realizes she can never, on her own, be an optimal decision-maker, she views herself as a decision architect in charge of designing her organization’s decision-making processes. If, before your next important decision, you give some thought to deciding how you will decide, you will be on the right track. And you will, perhaps, avoid making a terrible mistake.

From the book You’re About to Make a Terrible Mistake! by Olivier Sibony, Copyright © 2020 by Olivier Sibony. Reprinted by permission of Little, Brown Spark, USA, and Swift Press, UK. All rights reserved.

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