Tuesday, December 27, 2011

All Hail the Hunch

From this Matt Ridley article on the importance of intuition in decision making:

Wall Street Journal: All Hail the Hunch - and Damn the Details

...Dr. [Gerd] Gigerenzer has developed the startling claim that intuition makes our decisions not just quicker but better.

The article later added...

...complex problems do not necessarily need complex solutions, and more detailed analysis does not necessarily improve a decision, but often makes it worse. He believes, in effect, that less is more: Extra information distracts you from focusing on the few simple aspects of a problem that matter most.

The above brought to mind some things Charlie Munger and Warren Buffett have said on the importance of simplifying:

"...our model is too simple. Most people believe you can't be an expert if it's too simple." - Charlie Munger at the 2007 Wesco Meeting

"You've got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there's no precise numbering you can put to these factors. You know they're important, but you don't have the numbers. Well practically (1) everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they're taught in academia, and (2) doesn't mix in the hard-to-measure stuff that may be more important. That is a mistake I've tried all my life to avoid, and I have no regrets for having done that." - Charlie Munger in this speech at UC Santa Barbara

"Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever." - Warren Buffett

"The business schools reward difficult complex behaviour more than simple behavior, but simple behavior is more effective." - Warren Buffett

"If you need to use a computer or calculator to make the calculation, you shouldn't buy it." - Warren Buffett at the 2009 Berkshire Hathaway Shareholder Meeting

"Warren talks about these discounted cash flows. I've never seen him do one." - Charlie Munger

"It's true," replied Buffett. "If (the value of a company) doesn't just scream out at you, it's too close." - from the 1996 shareholder meeting

More from the Wall Street Journal article....

The complex algorithms that gave AAA ratings to debts that should not have passed the smell test demonstrated all too well the futility of knowing too much.

Simplifying where possible is crucial. I think the essential insight, that hunches often produce quicker and better results, is useful but this could easily get taken too far.

Munger has previously mentioned this injunction of Albert Einstein: "everything should be made as simple as possible – but no more simple."

Things need to be kept as simple as possible but, depending on the specific problem, shouldn't be oversimplified. Effective critical thinking is required to solve difficult problems.

Figuring out the right balance is the tough part.

Adam

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