Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

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vineviz
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Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by vineviz » Mon Dec 03, 2018 9:14 am

The name of behavioral economist Daniel Kahneman will be familiar to many Bogleheads who have studied the interaction between financial decision making and cognitive biases.

This recent short article provides a succinct explanation of why intuition doesn't work when it comes to investing.

https://www.thinkadvisor.com/2018/11/16 ... on-even-f/
According to Kahneman, who’s studied when one can trust intuition and when one cannot, there are three conditions that need to be met in order to trust one’s intuition.

• The first is that there has to be some regularity in the world that someone can pick up and learn. . . .people who pick stocks in the stock market do not have it. “Because, the stock market is not sufficiently regular to support developing that kind of expert intuition,” he explained.

• The second condition for accurate intuition is “a lot of practice,” according to Kahneman.

• And the third condition is immediate feedback. Kahneman said that “you have to know almost immediately whether you got it right or got it wrong.”

When those three kinds of conditions are satisfied, people develop expert intuition.

“But unless those three conditions are satisfied, the mere fact that you have an idea and nothing else comes to mind and you feel a great deal of confidence — absolutely does not guarantee accuracy,” he added.
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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by regularguy455 » Mon Dec 03, 2018 9:43 am

Glad to see Kahneman getting the credit he deserves. For those who are unfamiliar, Amos Tversky and Daniel Kahneman basically created the field of behavioral economics. Kahneman won the Nobel Prize for creating Prospect Theory (Tversky died before he could be recognized). Kahneman's book "Thinking Fast and Slow" exhaustively covers cognitive illusions we fall for. Michael Lewis wrote a book called "The Undoing Project" a few years ago which also covers their relationship as a biography. If you have't heard of these two, they're fascinating individuals that are worth learning more about.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by latesaver » Mon Dec 03, 2018 5:22 pm

regularguy455 wrote:
Mon Dec 03, 2018 9:43 am
Glad to see Kahneman getting the credit he deserves. For those who are unfamiliar, Amos Tversky and Daniel Kahneman basically created the field of behavioral economics. Kahneman won the Nobel Prize for creating Prospect Theory (Tversky died before he could be recognized). Kahneman's book "Thinking Fast and Slow" exhaustively covers cognitive illusions we fall for. Michael Lewis wrote a book called "The Undoing Project" a few years ago which also covers their relationship as a biography. If you have't heard of these two, they're fascinating individuals that are worth learning more about.
Seconded. Ariely deserves a nod as well, IMO.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by Fallible » Mon Dec 03, 2018 8:28 pm

Kahneman extensively develops intuition, in particular "expert intuition," in his book, Thinking, Fast and Slow. As he shows, intuition is often misunderstood and what some think is intuition is more emotion and gut feeling. A good example (pg. 12) is of a chief investment officer of a financial firm who invested millions of dollars in a company because he loved the company and its products.

Thanks for the link.
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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by 2015 » Mon Dec 03, 2018 10:55 pm

For me, Kahneman and the rest of the behavioral finance people blow the lid off investment theory. My favorite book in this area is "The Hour Between Man and Wolf: How Risk Transforms Us".

My strongest heuristic is to never, ever trust my intuition. I always wonder how I could be wrong whenever I have a gut reaction to anything.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by stoptothink » Tue Dec 04, 2018 10:33 am

regularguy455 wrote:
Mon Dec 03, 2018 9:43 am
Glad to see Kahneman getting the credit he deserves. For those who are unfamiliar, Amos Tversky and Daniel Kahneman basically created the field of behavioral economics. Kahneman won the Nobel Prize for creating Prospect Theory (Tversky died before he could be recognized). Kahneman's book "Thinking Fast and Slow" exhaustively covers cognitive illusions we fall for. Michael Lewis wrote a book called "The Undoing Project" a few years ago which also covers their relationship as a biography. If you have't heard of these two, they're fascinating individuals that are worth learning more about.
"The Undoing Project" is one of the best books I've read in the last few years.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by VictoriaF » Tue Dec 04, 2018 10:43 am

As a general rule, System 1's heuristics have evolved in the ancestral environments as adaptions to natural threats. When you encounter natural threats in the modern life, heuristics and corresponding actions are still appropriate. For example, you jump away from snakes, don't pick up unfamiliar mushrooms, and stay away from thunderstorms.

However, many heuristics are maladapted to the modern life. Yon don's jump away from a snake-oil salesman, pick up food with unfamiliar chemical ingredients, and don't stay away from the risks of driving. When heuristics do not match the environment they produce biases. Financial markets is one such environment.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by bearcub » Tue Dec 04, 2018 11:42 am

People like to hear good things about their bad habits. I am pretty good at picking out malignant narcissists today. Intuition, well am grateful for that.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by Valuethinker » Tue Dec 04, 2018 11:49 am

bearcub wrote:
Tue Dec 04, 2018 11:42 am
People like to hear good things about their bad habits. I am pretty good at picking out malignant narcissists today. Intuition, well am grateful for that.
The tricky bit there is to override your "gut feel" about someone. They are usually adept at emitting "warm friendlies" and finding (irrelevant) areas of common ground (support for same sports teams, fan of same sports etc.)-- they are "good guys" and "one of us".

In other words, watch what they *do* and where it disjunctures from what they *say*.

That kind of personality type is pretty consistent and uses some pretty consistent defence mechanisms ("gaslighting" in particular - denying they said or did that, or asserting you did or said something that you did not; outrage or denial when confronted with objective evidence; also projection - accusing you of the act or sin that they committed). They don't tend to change much over their lives in my experence.

Conrad Black (of Hollinger infamy) was chucked out of Canada's most prestigious private school for stealing exams, copying them, and selling them to other students. The son of a rich man, he believed that the rules did not apply to him-- hence his misuse of Hollinger's, a public company, assets for his personal use. His trip to a US prison was predicted by this action. EDIT Jeffrey Archer, later convicted of perjury in an unrelated case, charged in the early 1970s for stealing 3 suits out of a Canadian department store (he said that he had forgotten to pay and was found innocent).

A problem is that success at the highest level of organizations requires a degree of narcissism and selfishness - a bit of the psychopath, but not too much. Read any biography of Winston Churchill or George S Patton. Franklin Roosevelt was a far more complex and deceptive individual than either Herbert Hoover or Jimmy Carter, but their presidencies were failures and his was one of the most accomplished in American history (you can say that whether you agree with him or disagree with him). Or comparing Woodrow Wilson to Franklin Roosevelt, the latter was much less morally admirable, but achieved far more. Lyndon Johnson and Richard Nixon are 2 examples of incredibly talented men of vast accomplishments in office who eventually fell to the dark side.

If you've read "Snakes in Suits" there's quite a bit of discussion about how the modern corporation, with its constant reorganizations and changes of direction, makes it relatively easy for such people - before they are found out, they have moved on and their track record is obliterated along with the organizational memory. They often "get results" in the short run but in the long run leave the organization or business unit fatally damaged due to short term decisions and poisoned culture.

"Chainsaw Al" is the classic example from corporate life (Dunlap? at Sunbeam?). Jeff Skilling of Enron might be another.
Last edited by Valuethinker on Tue Dec 04, 2018 12:02 pm, edited 2 times in total.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by Valuethinker » Tue Dec 04, 2018 11:50 am

Fallible wrote:
Mon Dec 03, 2018 8:28 pm
Kahneman extensively develops intuition, in particular "expert intuition," in his book, Thinking, Fast and Slow. As he shows, intuition is often misunderstood and what some think is intuition is more emotion and gut feeling. A good example (pg. 12) is of a chief investment officer of a financial firm who invested millions of dollars in a company because he loved the company and its products.

Thanks for the link.
Although, indeed, many many people here cited their love of Apple products as their reason for owning the stock. So sometimes you get lucky.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by Fallible » Tue Dec 04, 2018 5:32 pm

Valuethinker wrote:
Tue Dec 04, 2018 11:50 am
Fallible wrote:
Mon Dec 03, 2018 8:28 pm
Kahneman extensively develops intuition, in particular "expert intuition," in his book, Thinking, Fast and Slow. As he shows, intuition is often misunderstood and what some think is intuition is more emotion and gut feeling. A good example (pg. 12) is of a chief investment officer of a financial firm who invested millions of dollars in a company because he loved the company and its products.

Thanks for the link.
Although, indeed, many many people here cited their love of Apple products as their reason for owning the stock. So sometimes you get lucky.
Right. And if one buys a stock out of love alone, one has to get lucky.
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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by xb7 » Tue Dec 04, 2018 9:18 pm

Great stuff.

I've always felt that intuition is something to rely on relatively more or less based also on how much homework/other work I've done to "feed my intuition engine". So if I don't have a lot of data about something, or I haven't done much or any work to convert data into 'information' --- then any intuitive feelings I might have should be given little weight. But if I've been studying, working at understanding from different angles, digesting a lot of data/information about whatever it is, then over time I might want to give a little more weight to "feelings".

I very much like the three conditions approach too, and would consider these ideas to work well together.

I guess it depends in part on personality and related biases. I'm biased to work things out logically with supporting data whenever I can do --- i.e., to base or tilt decisions on intuition as more of a last resort.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by siamond » Tue Dec 04, 2018 10:28 pm

VictoriaF wrote:
Tue Dec 04, 2018 10:43 am
As a general rule, System 1's heuristics have evolved in the ancestral environments as adaptions to natural threats. When you encounter natural threats in the modern life, heuristics and corresponding actions are still appropriate. For example, you jump away from snakes, don't pick up unfamiliar mushrooms, and stay away from thunderstorms.

However, many heuristics are maladapted to the modern life. You don't jump away from a snake-oil salesman, pick up food with unfamiliar chemical ingredients, and don't stay away from the risks of driving. When heuristics do not match the environment they produce biases. Financial markets is one such environment.
Very well said, Victoria, you nailed it. Can't agree more.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by Theoretical » Wed Dec 05, 2018 12:20 pm

And the third condition is immediate feedback. Kahneman said that “you have to know almost immediately whether you got it right or got it wrong.”
I think this one in particular separates the gut from the accurate snap judgement.

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Re: Daniel Kahneman: Your Intuition Is Wrong, Unless These 3 Conditions Are Met

Post by Fallible » Wed Dec 05, 2018 3:00 pm

Theoretical wrote:
Wed Dec 05, 2018 12:20 pm
And the third condition is immediate feedback. Kahneman said that “you have to know almost immediately whether you got it right or got it wrong.”
I think this one in particular separates the gut from the accurate snap judgement.
This may be true, although the second requirement - lots of practice - has to be there before the third condition can kick in.

Kahneman has often referred to a succinct definition of intuition (actually, the stages of intuition followed by the definition) from the late economist Herbert Simon, who studied chess masters and their intuition gained after thousands of hours of practice:
The situation has provided a cue; this cue has given the expert access to information stored in memory, and the information provides the answer. Intuition is nothing more and nothing less than recognition.
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