Gerd Gigerenzer, Analysis or intuition? | www.notenstein.ch
A Swiss bank runs an interesting publication of dialogues to provide a more thoughtful insight on the world of investing. Since longer term investing and managing private wealth has so much to do with socio-economic trends, I find them useful to follow.
A recent interview was with Gerd Gigerenzer, a German psychologist who has studied the use of bounded rationality and heuristics in decision making. He argues that not all risks are calculable and data is not enough, so we need sound intuition.
Intuition is felt, based on personal experience, an unconscious intelligence. It is 'mostly buried under a mound of unreliable and contradictory information'. And although we all use it, 'few are prepared to admit publicly....Fear prevails. For is something goes wrong, you look pretty silly if you cannot explain your decision. And intuitive decisions mean accepting personal responsibility'. So we launch ourselves and our teams into analysis paralysis to cover ourselves.
The argument is that data and analysis is flawed too. The financial crisis saw multiple 'black swans'. Complex models do not always best resolve complex problems. 'Complex models suffer from...variance...they react too sensitively to random characteristics of small samples.'
So simple models and intuition have bias, while complex models have variance. Both are forms of risk and the challenge is to arm ourselves to know how to use and manage both. I can apply this to multiple examples of forecasting in business, where 'back of the envelope' and 'bottoms up' model display attributes of intuition and complexity.
Gerd Gigerenzer is Director at the Max Planck Institute for Human Development and Director of the Harding Center for Risk Literacy in Berlin
A Swiss bank runs an interesting publication of dialogues to provide a more thoughtful insight on the world of investing. Since longer term investing and managing private wealth has so much to do with socio-economic trends, I find them useful to follow.
A recent interview was with Gerd Gigerenzer, a German psychologist who has studied the use of bounded rationality and heuristics in decision making. He argues that not all risks are calculable and data is not enough, so we need sound intuition.
Intuition is felt, based on personal experience, an unconscious intelligence. It is 'mostly buried under a mound of unreliable and contradictory information'. And although we all use it, 'few are prepared to admit publicly....Fear prevails. For is something goes wrong, you look pretty silly if you cannot explain your decision. And intuitive decisions mean accepting personal responsibility'. So we launch ourselves and our teams into analysis paralysis to cover ourselves.
The argument is that data and analysis is flawed too. The financial crisis saw multiple 'black swans'. Complex models do not always best resolve complex problems. 'Complex models suffer from...variance...they react too sensitively to random characteristics of small samples.'
So simple models and intuition have bias, while complex models have variance. Both are forms of risk and the challenge is to arm ourselves to know how to use and manage both. I can apply this to multiple examples of forecasting in business, where 'back of the envelope' and 'bottoms up' model display attributes of intuition and complexity.
Gerd Gigerenzer is Director at the Max Planck Institute for Human Development and Director of the Harding Center for Risk Literacy in Berlin
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