Intuitively Wrong

Adam M. Grossman

ROBERT SOROS, son of billionaire hedge fund manager George Soros, has a surprising explanation for his father’s success: “You know the reason he changes his position on the market or whatever is because his back starts killing him.”

You read that right: The younger Soros attributes his father’s success to a sort of sixth sense—as if he can feel the market in his bones. He goes on: “My father will sit down and give you theories to explain why he does this or that.” But, Robert says, “It has nothing to do with reason. He literally goes into a spasm, and it’s this early warning sign.”

In Soros’s case, if you believe his son, intuition has helped make him one of the world’s wealthiest people. Does this mean that you, too, should trust your gut when making financial decisions?

Nobel Prize winner Daniel Kahneman has been studying this question for decades. His conclusion: Yes, intuition can be effective—but only when you meet three conditions:

First, there must be regularity in whatever you’re trying to predict. An example is a chess board, where the set of outcomes is finite. Even if that finite set is large, there’s still enough regularity that a master can develop reliable intuition. Kahneman also points to medicine, where experienced physicians can indeed develop accurate intuition. In short, Kahneman says, “you have to ask… if it’s a good domain, one in which there are regularities that can be picked up by the limited human learning machine.”

Second, you need a lot of practice. If you’re fortunate to work in a field that does have the necessary regularity, the next requirement is that you need frequent and numerous opportunities to hone your expertise. If you’ve played chess, or you work as a physician or in another scientific field, you can probably attest to that. After five or 10 or 20 years of practice, you can probably recognize patterns a mile away that, earlier on, you might have missed.

Kahneman’s final requirement is immediate feedback. In addition to regular practice, you need to know whether you’re actually succeeding. If feedback is indirect or delayed, it’s that much harder to develop intuition.

What does Kahneman say about the world of finance? Is it possible to develop intuition about the economy or the stock market? In a word, no. That’s because it fails the first criterion: regularity. Unlike a physical or scientific process, or even a game of chess, the economy is driven by a nearly infinite number of factors, many of which interrelate in unpredictable ways. There are too many variables and they never present themselves in exactly the same way.

I have seen this firsthand. In 2008, shortly after the release of the first iPhone, I remember meeting an investment manager who remained a staunch supporter of Research in Motion (RIM), the company that made the BlackBerry. To him, the iPhone didn’t represent a threat, for this reason: “I play tons of golf with Jim Balsillie [then the CEO of RIM]. These guys didn’t just suddenly become dumb.” In other words, he was relying on intuition. Since that time, RIM’s share price has lost nearly all its value.

But what about George Soros and his back spasms? Clearly, his success speaks for itself and, according to his son, intuition accounted for a large part of it. I see a few possible explanations: It could be that, when Robert made those comments, he didn’t fully understand his father’s process. In other words, maybe it looked more subjective than it was. While it makes for a colorful story, I doubt Soros’s back pain was his primary source of data.

Another possible explanation: Perhaps Soros limited his bets to narrow areas within finance that do meet Kahneman’s three criteria. A final explanation may be “all of the above.” It may be that Soros brought a unique combination of skill, luck and intuition to specific areas where it gave him an extraordinary edge.

Whatever the explanation, I think it’s clear that the number of George Soroses in the world is very limited. However he does what he does, I don’t believe it’s a useful model for the rest of us.

At a time like this, with so much financial uncertainty, it’s tempting to turn to intuition. It’s much more comforting to try to guess where things are going than to surrender to the alternative—accepting that we just don’t know. But here’s my advice: If you think your back is telling you something, it’s probably better to visit the orthopedist than your stockbroker.

Adam M. Grossman’s previous articles include Paper TigersWhat Matters MostHappy Compromises and Pushing Prices. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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