Head vs. Gut: Why Intuition Beats Rationality in Making Good Business Decisions

A good while ago I read an article in the Harvard Business Review titled 'When to Trust Your Gut.'

This is a subject I've spent some time thinking about. And my feeling has always been that experience-based gut instincts are more valuable than MBAs from the likes of Harvard, Wharton, or Yale.

I was happy to see that this article supported my view.

The author, Alden M. Hayashi (who was senior editor of HBR when the article was published), says quite correctly that, in making good business and career decisions, it makes sense to rely on both reasoning and gut feelings.

'The higher up the corporate ladder people climb,' Hayashi says, 'the more they'll need well-honed business instincts.'

In lowlier positions, he argues, one should rely more on facts, figures, and established protocols. Instinct is still important, but when you're new to a company your gut can lead you astray.

This makes sense when you consider that the nature of a new position or company may be different from what you've seen before.

Middle managers who shoot from the hip often make costly mistakes, Hayashi says. But those who sharpen their pencils and follow the rules keep the bottom line black.

After one moves up the power chain, however, attention to detail becomes less important, Hayashi argues. At a certain level, having a reliable gut instinct is perhaps the most valuable thing.

Hayashi looks to the late Ralph S. Larsen, former chairman and CEO of Johnson & Johnson, to explain why.

'Very often, people will do a brilliant job up through the middle-management levels, where it's very heavily quantitative in terms of the decision-making,' Larson says.

'But then they reach senior management,' he continues, 'where the problems get more complex and ambiguous, and we discover that their judgment or intuition is not what it should be. And when that happens, it's a problem. It's a big problem.'

Richard Abdoo, former chairman and CEO of Wisconsin Energy Corporation, agrees. He says that as business speeds up and decisions must happen faster, instinct is even more important.

Henry Mintzberg, professor of management at McGill University and longtime proponent of the utility of intuition, believes the subconscious mind is always processing things the conscious mind may not be aware of.

A sense of revelation (the 'Aha!' moment) occurs when the conscious mind finally learns something that the subconscious mind has already known.

I agree.

Decision-making at the higher levels of business cannot rely solely on rational thinking and logic. To make the best decisions, we must also call into play our emotional intelligence. ('Emotional intelligence' is basically the same as our 'gut feelings.')

To explain how gut feelings work, Hayashi refers to Herbert A. Simon, a professor of psychology and computer science at Carnegie Mellon University.

Simon, who studied decision-making for decades, claims that gut feelings result from observing repeated patterns and rules. Emotional intelligence involves noticing, storing, and 'chunking' such patterns so we can retrieve them instantly and automatically.

In my own non-scientific thinking about gut feelings over the years, I've come to the same conclusion.

The human mind has an amazing capacity to recognize and 'remember' patterns. Much greater than our ability to remember and recall facts.

In chess, for example, Simon found that grandmasters are able to recognize and recall about 50,000 major patterns of the huge number of ways in which the various pieces can be arranged on a board.

How do they do it? How is it that some executives seem to have the superhuman ability to make good and profitable decisions?

It's all about this mysterious process of recognizing and storing patterns. According to Hayashi, the experts say they do this while also 'cross-indexing' them. That's when our brains find patterns in one experience that correspond to patterns in other experiences and 'tag' them for instant and automatic recall when we need them.

I - and just about every advertising writer I know - do this routinely. While watching commercials about a Rolex, we may notice a pattern in the pitch that is similar to a newspaper ad on vitamins and/or a radio spot on some financial scheme.

We sometimes recognize the patterns consciously. Very often we don't. But they are all there, somewhere in our gut.

And that's why, if you want to become a better decision-maker in building wealth, you should expose yourself to as many ideas and experiences about business and finance and investing that you can - even if that means going as far as reading the Harvard Business Review.

PS: The Wealth Builders Club is a repository of ideas and experiences in business and finance - the kind of input that collects in your head and creates success as its output. If you are pen to new ideas, if you are looking to grow, if you are wondering how to sharpen your instincts - this Club could be your answer. Why not see what it's about? Click here.

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