Published in the San Diego Union-Tribune, October 10, 2016
How good is your “gut” at making important decisions?
John Coates is a researcher at Cambridge University, and he decided to study “whether gut feelings were merely the stuff of myth or something real” by looking at traders on Wall Street. Did they do better when they did weeks of analysis and due diligence, or when they shot first and aimed later? Coates was not just a researcher, he was a former trader at Goldman Sachs and Deutsche Bank.
Coates focused on physiology, heart rate, back pain, stomach upset, sweat – monitoring the vital signs. In an earlier study, he saw that there were distinct physiological signs of distress during market volatility – but the traders did not believe they were at risk. In other words, their body was sending out red alerts and their brains were ignoring them. Like having four drinks in an hour and assuming you were good to go in the car.
A famous trader, George Soros, relied on “animal instincts.” He used the onset of acute back pain as a signal that something was wrong with the portfolio. I am fascinated by analyzing risk/reward. So Coates set up an experiment. Using heart rate monitoring equipment, he asked a group of traders to silently count their heartbeats without touching their chest or pulse – and then a control group who were not traders to do the same. It turns out the traders did much better at monitoring, they were more attuned to their heart rates – and here is the kicker, when Coates went back and looked at their trading records, the ones who counted the most accurately were also the ones who produced the most profitable trades.
Now let’s muddy the water a bit. Gut instinct is not the same as intuition. Harvard Professor Eric Bonabeau, has written a paper in which he states, “detached from rigorous analysis, intuition is a fickle and undependable guide. In highly complex problems (i.e. the more options you have to evaluate, the more data you have to weigh) the less you should rely on intuition and the more on reason and analysis.”
But we love the myth of the gunslinger (“The Magnificent Seven”). The “push all the chips into the middle” guys like Fred Smith (FedEx), Michael Eisner (green lighted “Who Wants to be a Millionaire”), Andy Bechtolsheim (first investor in Google, with no legal piece of paper). They trusted their gut. But of course the playing field is also littered with vastly more corpses of people who died like dogs having bet the farm based on a feeling – and ended up homeless on the streets of Laredo.
Bonabeau says, “the romance of the gut and listening to the subconscious makes us feel special. After all, any idiot can run the numbers, but the gift of a good gut – that is reserved for the true business elite.” .
The answer is nuanced of course, because if you listen to your gut AND you run the numbers, do the hard work analysis, but check your heart rate and do yoga for your back, study pattern recognition, your chance of getting it right — well I default back to my favorite economist, Dan Kahneman’s book, “Thinking Fast and Slow.” There are times for both. Not the most satisfying answer, but probably the right one.
UPDATE: Regular readers will remember the column in early August about Defy Ventures and the Donovan State Prison project.
You, gentle readers, contributed over $30,000 (ranging from $25 to $5,000), the VCs in a Van gang (me and three pals) contributed $40,000. The big gun was Union Bank Foundation, with Kathy Patoff at the helm, which pledged $50,000. The Donovan management team met with the Defy team at the prison and then at my house, and prospects for the program look bright. We will continue to keep you posted in this column.
Rule No. 482: If it were obvious, we’d all be millionaires.