The wisest choices depend on instinct and careful analysis


John Kay in the Financial Times: “Moneyball, Michael Lewis’s 2003 book on the science of picking baseball teams, was perhaps written to distract himself from his usual work of attacking the financial services industry. Even after downloading the rules of baseball, I still could not fully understand what was going on. But I caught the drift: sabermetrics, the statistical analysis of the records of players, proved a better guide than the accumulated wisdom of experienced coaches.

Another lesson, important for business strategy, was the brevity of the benefits gained by the Oakland A’s, Lewis’s sporting heroes. If the only source of competitive advantage is better quantitative analysis – whether in baseball or quant strategies in the financial sector – such an advantage can be rapidly and accurately imitated.

At the same time, another genre of books proclaims the virtues of instinctive decision-making. Malcolm Gladwell’s Blink (2005) begins with accounts of how experts could identify the Getty kouros – a statue of naked youth purported to be of ancient Greek provenance and purchased in 1985 for $9m – as fake immediately, even though it had supposedly been authenticated through extended scientific tests.

Gary Klein, a cognitive psychologist has for many years monitored the capabilities of experienced practical decision makers – firefighters, nurses and military personnel – who make immediate judgments that are vindicated by the more elaborate assessments possible only with hindsight.
Of course, there is no real inconsistency between the two propositions. The experienced coaches disparaged by sabermetrics enthusiasts were right to believe they knew a lot about spotting baseball talent; they just did not know as much as they thought they did. The art experts and firefighters who made instantaneous, but accurate, judgments were not hearing voices in the air. But no expert can compete with chemical analysis and carbon dating in assessing the age of a work of art.
There are two ways of reconciling expertise with analysis. One takes the worst of both worlds, combining the overconfidence of experience with the naive ignorance of the quant. The resulting bogus rationality seeks to objectivise expertise by fitting it into a template.
It is exemplified in the processes by which interviewers for jobs, and managers who make personnel assessments, are required to complete checklists explaining how they reached their conclusion using prescribed criteria….”