The Evidence & Intuition.

February 27, 2010 · Filed Under Business, Business Ideas & TIps · Comment 

In a recent blog post I  outlined the 5 aspects that make our intuition unreliable and inconsistent. We need to consider the alternative to purely relying on human intuition in business.  There are numerous factors in play in business from the various market forces to the various customer, direct customer base to internal team issues, government issues, economical issues etc. Even the simplest business has a number of factors at play and relying only on human intuition means that some flawed decisions are being made.

I must reiterate that I’m not saying that we must never use human intuition.  My point is that leading & managing only by intuition is a problem.

As I have asked in recent days “how do you know”.  We must look at data and understand what pattern is in the data. But it is not just any old data. Just because it is easy to get it does not necessarily mean that it is important.

The first step is to understand what is driving the business and then determine what we need to measure.

There are a raft of statistical techniques designed to find patterns and I don’t wish to complicate the management of small business in referring to statistically techniques however a number of these are very simple to utilise in a small business but can be extremely useful.

The use of statistically techniques can be applied to any setting including wine evaluation. Princeton economist Orley Ashenfleter predicts Bordeaux wine quality and hence eventual price using a model he developed that takes into account winter and harvest rainfall and growing season temperature. Massively influential wine critic Robert Parker has called Ashenfleter an absolute total sham and his approach is so absurd as to be laughable. But Ashenfleter was correct and Parker wrong about the 86 vintage. Also his way out on a limb predictions about the sublime quality of the 89 & 90 wines turned out to be spot on.

It’s not just wine that we can analyse the data to determine a more accurate prediction or to make a more informed decision.

But we need to measure what is important to the success of the business. This success factor will be found in the operations of the business not the financials.

To illustrate the power of looking at the evidence a paper in 2000 surveyed 136 studies in which human judgement was compared to algorithmic predictions. 65 of the studies found no real difference between the two and 63 found the equation performed significantly better than the person. Only 8 of the studies found that the people were significantly better predictors of the task at hand. If you are keeping score that’s just under 6% win rate for the people and their intuition and a 46% rate of clear losses.

So why is it that we continue to place so much stock in intuition and expert judgement. Overall it is clear we get inferior decisions and outcomes in critical situations when we rely on human judgement and intuition instead of hard cold boring data and measurement. This may be an uncomfortable conclusion but it’s the fact. We need to make better judgements thus we need to have those boring data and numbers.

Again I’m not proposing that we remove or dispense with the human expert or the human business owner but rather we couple the humans in the middle of an evidence based process. This has been the situation with medicine where the evidence conducted from numerous studies of techniques and processes and drugs pave the way for doctors to provide the correct diagnosis but it hasn’t removed the need for intuition of the expert specialist to make a judgement call. They are just being able to make it with the cold hard facts and the knowledge of the studies undertaken previously.

In a business if we have the information if we have the right numbers, if we have the right measurement then the management will be able to have this as their starting point for making decisions and determining the future of the business. Surely these decisions will be better informed as a result.

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