{"id":5532,"date":"2014-06-24T11:23:45","date_gmt":"2014-06-24T15:23:45","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5532"},"modified":"2018-09-21T02:03:52","modified_gmt":"2018-09-21T06:03:52","slug":"the-intuitive-investor-defining-intuition","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2014\/06\/24\/the-intuitive-investor-defining-intuition\/","title":{"rendered":"The Intuitive Investor: Defining Intuition"},"content":{"rendered":"

In order to properly set the stage for\u00a0additional discussion about the topic<\/a>, it is important to first define intuition. Once we have a common understanding of what is meant by intuition, the benefits of cultivating intuition will become more obvious.<\/span><\/p>\n

I think\u00a0Daniel Kahneman<\/a>\u00a0sets intuition up as a straw man for his behavioral economics theories. In his well-received book\u00a0Thinking, Fast and Slow<\/i><\/a>, of which I am a fan, he associates intuition with \u201cSystem 1\u201d thinking, which, he says, is \u201cfast thinking,\u201d characterized by snap assessments of situations, subconscious thinking, and thoughts processed in the brain\u2019s amygdala. Kahneman holds up \u201cSystem 2\u201d thinking as the opposite. It is \u201cslow thinking,\u201d characterized by deep analysis and processed in the prefrontal cortex.<\/span><\/p>\n

I submit, however, that he associates the wrong word with System 1 thinking.\u00a0It should not be intuition but instinct that is Kahneman\u2019s descriptor for System 1 thinking<\/i>. Kahneman himself seems to suggest this in his book, in which he says:<\/span><\/p>\n

\u201cThe capabilities of System 1 include innate skills that we share with other animals. We are born prepared to perceive the world around us, recognize objects, orient attention, avoid losses, and fear spiders.\u201d<\/span><\/p>\n

In fact, no less an authority on the meaning of words than the\u00a0Oxford English Dictionary<\/em>\u00a0(OED)<\/a>defines\u00a0instinct<\/em>\u00a0as follows:<\/span><\/p>\n

    \n
  1. Instigation; impulse; prompting.\u00a0Obs<\/em>.<\/span><\/li>\n
  2. Innate impulse; natural or spontaneous tendency or inclination. Formerly applicable to the natural tendencies of inanimate things. In modern use associated with sense.<\/span><\/li>\n
  3. (a)<\/strong>\u00a0spec<\/em>. An innate propensity in organized beings (esp. in the lower animals), varying with the species, and manifesting itself in acts which appear to be rational, but are performed without conscious design or intentional adaptation of means to ends. Also, the faculty supposed to be involved in this operation (formerly often regarded as a kind of intuitive knowledge).\u00a0(b)<\/strong>\u00a0Any faculty acting like animal instinct; intuition; unconscious dexterity or skill.<\/span><\/li>\n<\/ol>\n

    First, note the near match between Kahneman\u2019s definition of the word\u00a0intuition<\/em>\u00a0with the OED\u2019s definition of the word\u00a0instinct<\/em>. Note further that the OED relegates Kahneman\u2019s interchangeable use of instinct and intuition to its final definition (i.e., 3b) and that immediately preceding this definition, the dictionary explicitly states that instinct was \u201cformerly often regarded as a kind of intuitive knowledge.\u201d<\/span><\/p>\n

    Kahneman himself sets the stage for the importance of getting words right in his discussion of the word \u201cknow\u201d in his book, wherein he states on page 201:<\/span><\/p>\n

    \u201cI have heard too many people who \u2018knew well before it happened that the 2008 financial crisis was inevitable.\u2019 . . . This is a misuse of an important concept.\u201d<\/span><\/p>\n

    He then continues, stating that the words\u00a0intuition<\/em>\u00a0and\u00a0premonition,<\/em>\u00a0ironically enough, also are words that are misused (see page 202). In particular, Kahneman says that most people reserve both words \u201cfor past thoughts that turned out to be true . . . [but that] to think clearly about the future, we need to clean up the language that we use in labeling the beliefs we had in the past.\u201d<\/span><\/p>\n

    Here is the\u00a0Oxford English Dictionary<\/em><\/a>\u00a0definition of\u00a0intuition<\/em>:<\/span><\/p>\n

      \n
    1. The action of looking upon or into; contemplation; inspection; a sight or view. (= Latin\u00a0intuitus<\/em>.)\u00a0Obs.<\/em><\/span><\/li>\n
    2. The action of mentally looking at; contemplation, consideration; perception, recognition; mental view.<\/span><\/li>\n
    3. The action of mentally looking to or regarding as motive of action; ulterior view; regard, respect, reference.\u00a0With intuition to (of)<\/em><\/strong>, with reference to;\u00a0in intuition to<\/em><\/strong>, in respect to, in view of, in consideration of.\u00a0Obs<\/em>.<\/span><\/li>\n
    4. Scholastic Philos<\/em>. The spiritual perception or immediate knowledge, ascribed to angelic and spiritual beings, with whom vision and knowledge are identical.<\/span><\/li>\n
    5. (a)<\/strong>\u00a0Mod. Philos.<\/em>\u00a0The immediate apprehension of an object by the mind without the intervention of any reasoning process; a particular act of such apprehension.\u00a0(b)<\/strong>Immediate apprehension by the intellect alone; a particular act of such apprehension. (c) Immediate apprehension by sense; a particular act of such apprehension.<\/span><\/li>\n
    6. In a more general sense: Direct or immediate insight; an instance of this.<\/span><\/li>\n<\/ol>\n

      Note the OED\u2019s emphasis on such words as contemplation, inspection, consideration, perception, recognition, action, etc. Each of these words would, by Kahneman\u2019s own definitions, make intuition more of a System 2 phenomenon. Additionally, the fifth definition is particularly noteworthy, with its emphasis on such phrases as \u201cwithout the intervention of any reasoning process.\u201d This would mean that intuition requires things like contemplation and inspection, but that it results in apprehension without any reasoning process. This means that intuition in its actual meaning is likely a mental process not covered by either System 1 or System 2 thinking.<\/span><\/p>\n

      It is interesting to note that in previous editions of the OED (e.g.,\u00a0The Compact Oxford English Dictionary New Edition<\/em>, 1992), intuition was also described as<\/span><\/p>\n

      \u201cdirect perception of truth, fact, etc., independent of any reasoning process; immediate apprehension. . . . pure, untaught, noninferential knowledge.\u201d<\/span><\/p>\n

      So, intuition is definitively not a gut-level, instinctual response but is instead a flash of insight and brilliance brought on by a conscious act of contemplation or inspection.<\/span><\/p>\n

      But it is not just dictionaries that view intuition differently than Kahneman does. In a 2013 presentation as the keynote speaker at Battle of the Quants NYC, Emanuel Derman, author of the books\u00a0My Life as a Quant: Reflections on Physics and Finance<\/em><\/a>\u00a0and\u00a0Models. Behaving. Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life<\/a><\/em>andwhom many consider the grandfather of quantitative finance, pointed out that the foundations of science itself are the result of intuitive processes.<\/span><\/p>\n

      In his speech, Derman specifically pointed to Johannes Kepler, Sir Isaac Newton, Andr\u00e9-Marie Amp\u00e8re, James Clerk Maxwell, Albert Einstein, and Paul Adrien Maurice Dirac as scientists who experienced immediate apprehension and flashes of noninferential knowledge that advanced science in meaningful ways. These flashes of brilliance stand in stark contrast to Daniel Kahneman\u2019s System 1\u00a0and<\/em>\u00a0System 2 thinking.<\/em>\u00a0Also note the venue in which Derman chose to make his points about intuition \u2014 a quantitative finance professional conference. To drive the point home to the financial community, Derman made similar arguments in\u00a0the November\/December 2013\u00a0Financial Analysts Journal<\/em><\/a>.<\/span><\/p>\n

      In my book\u00a0The Intuitive Investor<\/a><\/em>, I describe intuition as \u201ctuning into the cosmic radio station.\u201d Using similar language, Derman says of intuition, \u201cThe observer becomes so close to the object (or person) observed that he begins to experience their existence from both outside and inside them. Intuition is a merging of the observer with the observed.\u201d This is nearly identical in meaning to my use of the words \u201ctuning in\u201d for my definition of intuition. The operative word is \u201ctuning\u201d or, if you prefer,\u201charmonization\u201d with the thing you are trying to apprehend. In both cases,\u00a0intuition requires both process and deliberation<\/em>, despite the ultimate \u201ceureka moment.\u201d<\/span><\/p>\n

      There are many consequences to the misuse of the word intuition, namely:<\/span><\/p>\n