Gut Power
If you’re a fan of the Daily Show, you probably saw Jon Stewart eviscerate Rick Santelli. This was extremely funny, and triggered quite the entertaining backlash from former hedge fund manager Jim Cramer. In one of the clips that Jon Stewart subsequently played, Cramer is shown talking about how his instincts for the market are telling him that Bear Stearns is doing fine. Of course, we all know what happened to Bear Stearns.
Now, my point here is not to bash Jim Cramer. The fact is, anyone who makes market predictions the way he does is going to be wrong a lot. That’s the nature of the game. Rather, my point is that trusting one’s gut is not always the best approach.
Gut instinct is not a magic power. The “gut instinct” for an untrained person being thrown in jujitsu is to reach out to protect themselves; that’s a great way to get hurt. Instinct, or gut feel, or whatever you want to call it, is something that is built up through practice and experience. Sandy Pentland, in his book Honest Signals, has a couple interesting suggestions for how gut feel might work. The short form, though, is that gut feel comes from rapidly and often unconsciously, recognizing that the current situation is similar to other situations you’ve experienced, and, through this pattern matching process, devleoping an appropriate response.
Sounds good, right?
To a point, it is. Any athlete will tell you that you have to train until your responses become instinctive. In fencing, for example, you don’t have time to think, you have to trust your intuition. That’s great, except when intuition leads you down the wrong path.
In sports, that’s relatively easy to fix. You go back to the drills and exercises you originally used, you go back to training with your coach, and you practice the correct response to the scenario. The tough part is when the trained response conflicts with the gut response. It’s difficult to accept when our intuition is wrong and work to change it.
Furthermore, the more complex the situation and the more hidden variables there are, the harder it is to pattern match correctly. Surface similarities will often fool our intuition into thinking it’s one situation when, in fact, it is another. Legendary stock trader Jesse Livermore once wrote that though he listened to his gut, he followed his rules. Why? Because when he just listened to his gut he lost money in a big way.
When you just rely on your gut, you have nothing to fall back on when things don’t work. Is this a temporary aberration or are you fundamentally wrong? If your gut told you to buy Bear Stearns at 50, well, your gut might be feeling a little bit unhappy right now.
Bruce Lee is famous for saying, “Learn the drill, master the drill, forget the drill.”
If you started with the drill, you have something to fall back on when instinct or intuition isn’t giving you the right answers. If you’re just relying on your gut and it stops working, what else do you do?
