Von Clausewitz, the great nineteenth century military strategist, thought deeply about decision making during the fog of war. Often the difference between success and failure on the battlefield was associated with quick and decisive decisions. He used the term "coup d'oeil", strategic intuition, the ability at a glance to make a decision as a necessary skill for a successful commander. More precisely, this intuition is the "Rapid discovery of a truth which to the ordinary mind is either not visible at all or only becomes so after long examination and reflection." Isn't that the skill of a good investor and trader?
However, intuition is often downplayed relative analytical skills with investment decision-making as if there is a choice between analytic and intuitive thinking. More recent models of intelligence and decision-making states that these two features, analysis and intuition, are actually tied together through the concept of "intelligent memory".
The analytics are the development of memory and the condensing of facts and information while the intuition is the correct recall or arrangement of these memories. Instead of analytics and intuition being mutually exclusive, these two skills work closely together. Analytics is the use of rigor with preparing for decision-making while the intuition is the creativity or use of this prepared information. Intuition is not something to be avoided or suppressed but a skill used to support decision making especially when time is critical.
"Intuitive decision making is the act of reaching a conclusion that emphasizes pattern recognition based on knowledge, judgment, experience, education, intelligence, boldness, perception, and character." - William Duggan, Columbia university management professor, assessing the US Army Field Manual 5-0 and its advise for officer decision making in his work "Coup D'oeil: Strategic Intuition in Army Planning". Intuition helps quicken the process with finding a course of action (COA).
A trader can do all of the analysis necessary of understanding the market situation, but then there needs a level of intuition to apply the analytics to specific course of investing action. Experience helps with taking action because similar situations have been seen in the past. There may be multiple courses of action; however, the experience which serves to focus intuition can reduce the choice set and allow of action at a glance.
A key question is whether this intuition is a skill that can be learned, improved, or made systematic. In a more formal sense, this is similar to what Gary Klein, the natural decision-making guru, would say is a Recognition Primed Decision Model (RPDM). Recognition of key analytics or details can prime or focus decision-making. Experience can sort through a broad set of data to find the signal within noise. While some would say this is in conflict with Kahneman system 1 and system 2 thinking, in reality, intuition as a means of focus is an important path for appreciating how decisions are made in real life.
While there may be some who have inherent skill at investing intuition, it is more likely that coup d'oeil is something that can be gained through repeated action and experience. As presented in the US Army manual, this is a skill that can be identified, processed, and learned. Yet, how can repeated action lead to improvement of intuition? How can this skill be applied to investment decision-making?
For many quants, the coup d'oeil or glance is conducted by a computer. The analytics point to possible choices which are hard-wired into a course of action. There is nothing wrong with this choice framework, but a similar process can also be applied to discretionary decisions.
I suggest that intuition for investing can improved through two processes that are applicable to all decision-making:
1. Logging decisions with after action review. Why was a decision taken? What was the outcome? Why did you get the decision right or wrong? Was it luck or within the bounds of what was expected? This process of measuring decision quality creates forced learning and the chance for improvement through a feedback loop.
2. Use analytic tools to shorten the decision preparation. If all of the data and information is readily available, more time can be spent on the decision that has to be made. You cannot see the opportunities at a glance if you have not prepared the field for observation. This marries analytics with intuition and allows for critical time to be spent on courses of action.
For more on Clausewitz and investing see the following:
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