Sunday, April 01, 2007


I love this quote attributed to Jack Welch (and I've probably got it wrong, sorry Jack):

If we are going to make this decision based on opinion, I prefer mine.

I like it because it is straight up - facts and analysis are credible scientific truth-seeking mechanisms. Opinions are based on all kinds of human biases.

I attended a meeting recently regarding a paper to be published soon, about studies regarding expert's ability to predict future success of startups based on business data presented by entrepreneurs. The study group was able to use neural nets and Bayesian analysis to "code" the startup team's properties such that it predicted success better than VCs. It's not published yet, so I don't want to spoil their thunder, but it looks fascinating.

What this says is that your "gut" reaction is undoubtedly worse than careful analysis. It might be really good for those life-and-death split-second decisions using that small part of your brain wired for preservation. The allure of the intuitive decision is strong; but there is no evidence that it chooses the correct direction, and there is some compelling evidence to the contrary.

A May 2003 HBR article called "Don't trust your gut" reported that in 2002 45% of surveyed executives relied more on instinct than facts and figures. That's a staggering and scary number. It's so much easier to go by gut reaction, but the article makes the case that we are such effective pattern recognition engines that we see patterns where none exist. The pattern recognition skills built into your most basic brain functions are fast but not particularly good at sorting through risk. It's biased for survival; I read somewhere recently where a man had been next to a window which blew in during a windstorm, and now he gets nervous whenever he hears wind... totally illogical, but the pattern is burned in his brain.

My dog is a great pattern recognition engine. She notices subtle movements, sounds and behaviors and can interpret with surprising accuracy what will happen next. Yet I wouldn't ask her to choose my stocks for me.

Bottom line? Do the math.

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