Can intuition play a role in investing? According to Daniel Kahneman, a Nobel Memorial Prize-winning behavioral economist, no.
During a speech given at the World Business Forum in New York City, Kahneman explained when people can trust their intuitive judgement and when they should be wary of it.
“Intuition is defined as knowing without knowing how you know,” he explained. “That’s the wrong definition. Because by that definition, you cannot have the wrong intuition. It presupposes that we know, and there is really a prejudice in favor of intuition. We like intuitions to be right.”
According to Kahneman, a better definition — or a more precise one — would be that “intuition is thinking that you know without knowing why you do.” By this definition, the intuition could be right or it could be wrong, he added.
Because, according to Kahneman, intuition can often be wrong. To show an example of this, Kahneman had the crowd guess the GPA of a college senior he called Julie. He told the crowd one fact about Julie — that she read fluently at a young age — and then asked them to judge how good of a student she had been.
From research, Kahneman, who wrote The New York Times bestseller “Thinking, Fast and Slow,” said that most people guess that Julie has around a 3.7 GPA.
“You might think that this is a good answer,” he said. “It’s a terrible answer. It’s an intuition, and it’s absolutely wrong. If you were to do it statistically, you would do it completely differently. Actually, the age that people read is very little information about what student they will be 20 years later.”
According to Kahneman, this is an example of an intuition that is generated automatically with high confidence, and it’s wrong statistically.
“In general, confidence is a very poor cue to accuracy. Because intuitions come to your mind with considerable confidence and there is no guarantee they’re right.”
There are certain times when intuition can be correct. For instance, Kahneman explained, chess players and married couples generally have accurate intuition.
“Intuitions of master chess players when they look at the board [and make a move], they’re accurate,” he said. “Everybody who’s been married could guess their wife’s or their husband’s mood by one word on the telephone. That’s an intuition and it’s generally very good, and very accurate.”