Decision Making

Nicholas Sabin, PhD

Class 12: Intuition and Expertise

 se
r w
u
Co rvie
v e 7. Stress & Scarcity
O 11. Model Building
12. Intuitive Expertise
8. Memory & Predictions
9. Information Overload
13. Improving Decisions 10. Social Influence
+ Week for Group Projects
. Fi nal
14
ro j e ct
P 5)
l y 2
( Ju
6. Midterm
Examination

1. Decision Theories 3. Rational Models

2. Dual-Process Thinking 4. Bounded Rationality
5. Decision Biases
 Final Applied Project
Reminder
Final Applied Projects:
• Full details on the FAE intranet
• Choose your group members (1, 2, 3, or 4 people) and select a topic!

Next Week No Class

• Time to focus on your final projects
• Email the professor if you have doubts ([email protected]) or
would like to meet to discuss your project.

• Final due date: July 25, 2023. 3:20pm.

– Submit Written Project (in English)
– Give 5 minute Oral Presentation (in English or Spanish)
 Imagine this scenario...
• You are a manager deciding between Project
A and B.
• Your team has provided a beautiful analytical
model for you. The model recommends
Project A.
• They had sufficient time, included all the
available information, and computed all the
analysis correctly.
• But you prefer Project B!

• What are the possible reasons for this?

 Reasons we may not follow
an analytical model
1) Irrationality
– It could be a mistake. You may be influenced by false
intuition. Consider all the potential biases we have
discussed.
2) Model is incomplete
– Not everything that matters can be quantified and
added to a model. E.g. reputation, trust, human
factors. You may be aware that some important
factors can not be included in the model.
3) Intuitive expertise
– Based on your experience, you have a feeling about
the correct answer. It is unconscious. You can not
explain exactly why. Note this is different from
awareness of an incomplete model.
Should Business Managers
use Intuition (System 1)?
“Intuition Is An Essential Leadership Tool”
- Forbes Magazine

Intuitio
n is “m
power ore
ful tha
intellec n
t
-Steve .”
Jobs
(Apple
Inc)

“Straight from the Gut”

-Jack Welch (CEO of G.E.)
Called “Manager of the Century”
 What is intuition?
• Example, who is going to
win the futbol game?
• It depends on how you
make the decision…
• It is not about whether the
decision is right or wrong

Deliberate Decisions Intuitive Decisions

• We are more conscious of • We are less conscious of
the reasoning VS the reasoning
[We can explain the reasons] [A feeling, difficult to explain]
Situations and factors that may lead to…

False True
Intuition Intuitive
Expertise
 System 1 Negative Biases
• Obviously, emotions affect our
decisions: anger, irritation,
happiness, sadness…
• Emotions are associated with
System 1, making it more
difficult to make deliberate
rational decisions
• We have learned of many
negatives biases already in this
class, e.g. stress effects
Source: Kahneman (2001) Thinking, Fast and Slow.
 Positive Emotions
• It’s not just negative emotions that produce bias…
also positive emotions

• Halo Effect
– One attribute influences our
impression of another
– Example:
Attractiveness on intelligence
• Optimism bias
– Consistently expecting good results
 Unconscious Triggers:
The Weather?
• Imagine you have applied to Medical School in
Toronto, Canada
• They have examined your University Grades
and your standardized test scores
• Now you are invited for an interview…

Source: Redelmeier & Baxter (2009) Rainy Weather and Medical School Admission Interviews
 Unconscious Triggers:
• Admissions Committee
– If there is no effect of
weather, what do we expect?
• 2926 candidates were
interviewed
• All ranked from 0 – 10 on
Interview Performance
• Sunny Days Avg Score: 6.5
• Rainy Day Avg Score: 6.3
• This is equivalent to a 10%
change in your Test Score
• Why might this occur?
– Interviewers are more
positive on sunny days?
Source: Redelmeier & Baxter (2009) Rainy Weather and Medical School Admission Interviews
Situations and factors that may lead to…

False True
Intuition Intuitive
Expertise
 True Intuitive Expertise
• An intangible feeling (your gut?)
– But it is not magic. It does not appear from nowhere.
• Best described as “Recognition from experience”
– “The situation has provided a cue: This cue has given the
expert access to [unconscious] information stored in
memory, and the information provides the answer.”

• We are all born with some intuition (e.g. avoid dangerous

animals)
• However, business intuition requires expertise (hours of
practice)
Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise: A Failure to Disagree
 Intuitive Expertise Example
• Nurses taking care of infant babies

• With years of experience, they can detect problems

before there are any “known” problems
Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise: A Failure to Disagree
 Another Example
Intuitive Expertise
• A master chess player walks past a game,
looks for 5 seconds and says:
– “White wins in three moves” and walks away

• How is this possible?

• He cannot actually analyze
all the possibilities
so quickly?

Source: Kahneman (2003) Maps of Bounded Rationality: Psychology for Behavioral Economics
 Chessmasters
• Researchers wanted to know how this is possible?
• How much can they remember in 5 seconds?
 Let’s try it ourselves
• How much can you remember in 5 seconds?
 Let’s try it ourselves
• How much can you remember in 5 seconds?
 Where does the expert
ability come from?
• Is it from natural abilities, like greater working memory?
• But it is NOT from working memory!
Random Structure Game Structure

If the pieces are random, experts If the pieces are in game structure,
can NOT remember them better experts can remember from
than normal players practice and past experience
Source: Hastie & Dawes (2010) Rational Choice in an Uncertain World. Chapter 1.
 Boundary Conditions
True Intuitive Overconfidence
Expertise & Bias

1. Regular Environments
1. Irregular Environments
2. Extended Learning
2. Limited Learning
Opportunity

False Intuition
Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise
 Conditions for
Intuitive Expertise
1. Environments with Regularity
§ Valid cues consistently occur in the situation
§ The noise between the cue and result is not too great
§ Cues are not readily quantified (for skilled intuition to
add value)
2. Extended Learning Opportunity
§ Type and quantity of practice
§ Level of engagement and motivation
§ Self-regulatory processes used
Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise: A Failure to Disagree
 Professional Situations
• The conditions for intuitive expertise OFTEN
remain unmet in professional contexts.
• However, System 1 will still feel engaged and
“have an opinion.”
• The result is overconfidence in one’s intuition.
– Susceptible to many biases!
• In these situations better to engage System 2
and emphasize deliberate slow thinking.
Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise: A Failure to Disagree
 Research on
Professional Industries
True Intuitive Overconfidence
Expertise & Bias

Doctors - Nurses

Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise

 Research on
Professional Industries
True Intuitive Overconfidence
Expertise & Bias

Political Analysts

Note: In these industries it is still possible to

make rational decisions, but it is better to
rely on System 2, data and analysis.
Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise
 Research on
Professional Industries
True Intuitive Overconfidence
Expertise & Bias

Human Resource
Managers

Note: In these industries it is still possible to

make rational decisions, but it is better to
rely on System 2, data and analysis.
Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise
 Research on
Professional Industries
True Intuitive Overconfidence
Expertise & Bias

Farmers - Livestock

Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise

 Research on
Professional Industries
True Intuitive Overconfidence
Expertise & Bias

Stockbrokers &
Financial Analysts

Note: In these industries it is still possible to

make rational decisions, but it is better to
rely on System 2, data and analysis.
Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise
 Financial Industries
– May know a lot about a particular
company, but stock prices are influenced
by a much greater set of factors…
– Their feedback [for intuitive learning] is
often too delayed, sparse, and
ambiguous.
– Whether that company was
appropriately priced you will not usually
learn until years later when many other
factors have happened in between.
Source: Kahneman & Klein (2009) Conditions for Intuitive Expertise: A Failure to Disagree
 Assess your
Intuitive Expertise
• Is intuitive expertise likely?

• So, we see from this mapping that our field of

business and finance is prone to intuitive
overconfidence…
• Until you become a skilled expert (and maybe
even then!) it is better to rely on deliberate
analysis.
 Readings
• Available on the Intranet:
Ø Kahneman & Klein (2009) Conditions for Intuitive
Expertise: A Failure to Disagree.

o Klein (2003) The Power of Intuition.

o Redelmeier & Baxter (2009) Rainy Weather and Medical
School Admission Interviews.

Ø Denotes required readings

o Denotes optional readings for greater depth