Intuitive Decision Making

Abstract

Should executives make decisions based on what their "gut" tells them? Lately that idea has lost some favor, as technology's ability to accumulate and analyze data has rapidly increased - supplanting, according to some accounts, the high-level manager's need to draw heavily on intuition. But intuition needs some rescuing from its detractors, and the place to start is by clarifying what it really is, and how it should be developed. Intuition is not a magical sixth sense or a paranormal process; nor does it signify the opposite of reason or random and whimsical decision making. Rather, intuition is a highly complex and highly developed form of reasoning that is based on years of experience and learning, and on facts, patterns, concepts, procedures and abstractions stored in one's head. In this article, the authors draw on examples from the worlds of chess, neuroscience and business - especially Austria's KTM Sportmotorcycle AG - to show that intuitive decision making should not be prematurely buried. They point out that although the study of intuition has not been extensively explored as a part of management science, studies reveal that several ingredients are critical to intuition's development: years of domain-specific experience; the cultivation of personal and professional networks; the development of emotional intelligence; a tolerance for mistakes; a healthy sense of curiosity; and a sense of intuition's limits. Companies should, of course, continue to exploit their abilities to mine data as a means of obtaining a competitive edge. But they shouldn't overlook the continuing value of experienced executives who can draw on their intuition to make decisions when the numbers yield a question rather than an answer: Now what do we do?

Full text

Intuitive Decision Making
FALL 2007 VOL.49 NO.1
REPRINT NUMBER 49108
Kurt Matzler, Franz Bailom and Todd A. Mooradian
Please note that gray areas reflect artwork that has been
intentionally removed. The substantive content of the ar-
ticle appears as originally published.

IN CONTEXT
The idea that execu-
tives should make
decisions according to
what their intuition or
“gut” tells them is gen-
erally out of favor. In a
scientific age, one’s
feelings are supposed
to be mastered, while
painstakingly col-
lected megabytes of
data reveal the correct
path. And yet people continue to feel — intuitively,
if you will — that this is an oversimplification. For
many complex decisions, all the data in the world
can’t trump the lifetime’s worth of experience that
informs one’s gut feeling, instinct or intuition.
Consider three brief examples. In the game of
chess, it appears that grandmasters are carefully
thinking through every possible move and counter-
move. But, as former World Chess Champion
Garry Kasparov explained in an interview, “The
total number of possible different moves in a single
game of chess is more than the number of seconds
that have elapsed since the big bang created the
universe.” For Kasparov, who claims to be able to
think up to 15 moves in advance, “intuition is the
defining quality of a great chess player.”
Of course, business is not a game, and much
more is at stake when an executive makes a decision
that will affect an entire company. Science, with its
often practical outcome — a new drug or technol-
ogy — is closer to business than chess. And while
Thomas Edison famously attributed the quality of
genius to “99 percent perspiration,” that remaining
one percent is often sublime. Further, scientists
themselves often address the importance of intui-
tion to their work. Consider the comments of
Anton Zeilinger, professor of experimental physics
at the University of Vienna and the leader of re-
search groups that have made breakthrough
discoveries in quantum teleportation and quantum
cryptography: “I believe the most important thing
is that you should … above all [trust] your own
feeling and your own intuition, and then act ac-
cordingly.” When faced with more than one path of
research, he always chooses the more radical one:
“Intuition guides me, gives me a feeling about
which direction I should continue in.”
A professor on the cutting edge of experimenta-
tion, however, might be expected to take this stance.
Wouldn’t a similar approach be foolish, or at least
very risky, in business? Not necessarily. Take the
evolution of KTM Sportmotorcycle AG, a large
manufacturer of motorcycles with headquarters in
Mattighofen, Austria. In 1992, Stefan Pierer be-
came CEO of the company as it emerged from
bankruptcy. After turning the company around in
the first two years of his tenure, he made a leap that
most observers — both inside and outside the
company — thought was more or less crazy.
The move? To take KTM, a leader in the manufac-
ture of off-road motorcycles, into the world of street
motorcycles, a completely different business and one
in which the company had no expertise. Despite
KTM’s lack of know-how and access to the market,
Pierer’s gut instinct told him it was the right thing to
do. And it did lead to success. KTM’s entry into the
street bike segment helped it become Europe’s sec-
ond-largest sport-motorcycle manufacturer, with 15
years of 25 percent revenue growth. By 2006, 29 per-
cent of the company’s revenues derived from its street
segment. For Pierer, intuition is critical to effective
decision making: “When it comes to really serious
business decisions I ultimately rely on my intuition.
It’s sometimes the case that rational arguments speak
for or against something, but then somehow the de-
cision still won’t leave me in peace. I wake up in the
night and have the feeling that I should do it differ-
ently after all.”
Recognizing Patterns
Many people wake up in the night with an intuitive
sense of a particular course of action they should take.
But few are successful CEOs or chess grandmasters.
What separates those people from the average?
Intuitive Decision Making
Despite the
welter of data
and analytics at
their disposal,
experienced
managers often
need to rely on
gut instinct to
make complex
decisions under
duress.
KURT MATZLER,
FRANZ BAILOM
AND TODD A.
MOORADIAN
FALL 2007 MIT SLOAN MANAGEMENT REVIEW 13

14 MIT SLOAN MANAGEMENT REVIEW FALL 2007
Go back to chess for a moment. A grandmaster
may play up to 50 games at once, making rapid-fire
decisions as he moves from board to board. Even in
tournaments against other top competitors, grand-
masters normally make a decision about where to
move within a few seconds. They spend the remain-
der of their allotted time thinking the move through
and considering whether it is the right one.
In such a complex game, how is it possible to
make the right decision within seconds? Consider
this experiment. Inexperienced chess players were
given a few seconds to examine the positions of 25
pieces, arranged as they might be midway through
a normal game. When asked after an interval to re-
position the pieces, they located on average only six
of the original positions. A chess master, however,
correctly replaced all 25 pieces.
One initially might attribute this outcome to
the master’s extraordinary ability to absorb and
store visual information. But a second part of the
experiment tells a different story. When the 25
pieces were placed on the board randomly, novice
players again positioned six pieces correctly — and
so did the masters. Why? A chess master sees a pat-
tern behind potential configurations of the game.
According to one estimate, a professional player
can recognize about 50,000 configurations. But if
the pieces are positioned in ways that make no
sense according to the rules of the game, he will be
unable to detect a pattern, and his results will be no
different from those of a novice.
As this experiment reveals, what we call intui-
tive decision making is really one’s ability to
recognize patterns at lightning speed — a process
that often happens unconsciously. This is an espe-
cially important trait for complex decisions.
Professor Gerald Hüther, a neuroscientist at the
University of Göttingen in Germany, told us that
the human brain functions like a computer only
when considering trivial decisions. Complex deci-
sions, however, bring into play a process in which
knowledge, experience and emotions are linked,
and this process is what people commonly think of
when they hear the word “intuition.” Research has
found that people who have acquired deep wells of
knowledge and experience — through their curi-
osity, openness and propensity to seize
opportunities — are able to reach good “intuitive”
decisions much more frequently than people who
possess a relatively limited sphere of experience.
And this brings us back to the development of in-
tuition in high-level managers.
Intuition and the Senior Executive
Intuition, then, needs some rescuing from its de-
tractors. It is not a magical sixth sense or a
paranormal process; nor does it signify either ran-
dom and whimsical decision making or the
opposite of reason. Rather, intuition is a highly
complex and highly developed form of reasoning
that is based on years of experience and learning,
and on facts, patterns, concepts, procedures and
abstractions stored in one’s head.
The question is, can executives hone their intui-
tion and thereby improve their chances of making
good decisions? While the study of intuition and its
benefits is a relatively new and unexplored area of
management science, studies reveal that the culti-
vation of instinct requires the following.
Experience The more extensive a decision maker’s
experience, the more patterns he or she will be famil-
iar with; the more patterns, the better the intuition.
When an experienced senior executive attributes a de-
cision to “gut instinct,” he is saying in different words
that he recognizes patterns from experience. Studies
in psychology have found that one needs at least 10
years of domain-specific experience to develop the
gut feeling needed to make good instinctive decisions.
Other studies have shown that senior executives at the
highest level make more intuitive decisions than sen-
ior executives at the middle and lower levels, and that
owners of small businesses make about the same pro-
portion of intuitive decisions as the most senior
executives of large companies.
Networks Executives need networks in order to
share experiences and to hear how their decisions
have been received. Top senior executives should
surround themselves with people who are their
equals and with whom they can maintain an open
climate of discussion.
Emotional Intelligence The neuroscientist Joseph
LeDoux has proven that the amygdala — site in the
brain of emotional memory — categorizes stimuli
and triggers behavior faster than cognitive processes.
In other words, emotion precedes cognition. Accord-
ing to psychologist Daniel Goleman, 90 percent of
the differences between top-performing and aver-
age-performing senior executives can be explained
by emotional intelligence. And this primarily means
being able to recognize and interpret one’s emotions.
IN CONTEXT
SLOANREVIEW.MIT.EDU

FALL 2007 MIT SLOAN MANAGEMENT REVIEW 15
Tolerance Intuition grows best in an environment
in which both positive and negative experiences can
be had. For top management, this requires a will-
ingness to tolerate mistakes. Senior executives can
create such cultures by publicly and continuously
supporting people who take risks and make mis-
takes. As Nestlé S.A. CEO Peter Brabeck-Letmathe
told us about the process of hiring or promoting
senior executives, “[I]t is just as important to inves-
tigate [their] failures or defeats [as their successes].
In my view, only someone who has some failures to
show in their history can carry out a leadership role
in a forward-looking way, because only
then is it clear that the person was willing
to take risks.”
Curiosity Despite career pressures, sen-
ior executives shouldn’t rein in their
curiosity — it is a prerequisite for discover-
ing new opportunities. As management
guru Peter Drucker wrote, “A good man-
ager always focuses his attention more strongly on
opportunities than on risks … constantly worrying
about problems does not really move things forward.
Doing this merely averts damage to the company.
Positive results can only come about if senior execu-
tives consistently exploit opportunities. Thinking
and acting in an opportunity-oriented way is a pre-
requisite for striking new paths. Striking new paths is
a prerequisite for gathering experiences. And intui-
tion needs experience.”
Limits Like any good thing, a reliance on intuition
can be taken to extremes. Again, Drucker’s words
are wise: “I believe in intuition only if you discipline
it. The ‘hunch’ artists, the ones who make a diagno-
sis but don’t check it out with facts, with what they
observe, are the ones … who kill businesses.” As
with the chess master who spends a fair amount of
time rethinking the decision he intuitively made
within seconds, executives should reflect on their
intuitive decisions before they execute them.
Making Their Own Luck
Successful senior executives appear to possess the
ability to be lucky, to be able to exploit chance situa-
tions. In fact, however, some people are more
capable than others of recognizing “chance” oppor-
tunities and seizing them at the right moment. They
detect weak signals that others don’t see and recog-
nize patterns before others can. As University of
Innsbruck professor emeritus Hans Hinterhuber
told us, they are able to filter out the “many ambigu-
ous, contradictory and frequently deceptive pieces
of information from those pieces of information
that are required for strategic decisions.”
In a 2006 interview, the CEO of T-Mobile Interna-
tional AG & Co. KG, René Obermann, explained why
this ability is so important. (Obermann is now CEO
of Deutsche Telekom, T-Mobile’s parent company.)
Ticking off a list of highly successful recent innova-
tions, he noted that quantitatively oriented market
research had failed to predict the massive enthusiasm
for pocket-sized personal computers, text messaging
and wireless e-mail service. Such cautionary tales, in
part, led the company to “rely very heavily on the re-
sults of qualitative research and on our own intuition
in our new product development process. The entire
management and development team has extensive
experience in the market, and I believe it is able to very
accurately assess what areas we should pursue.”
In an age of data overload, such confidence is
critical, as analytics can never trump the intuition
— wrought by years of experience and accumula-
tion of knowledge, and tempered by emotional
intelligence — of a thoughtful, curious executive
constantly seeking new opportunities. Under the
right conditions, companies can help foster a cli-
mate in which such people are developed. And
that’s an intuitive lesson worth considering.
Kurt Matzler is professor of international management at
Johannes Kepler University in Linz, Austria. Franz Bailom
is managing director of Innovative Management Partner, a
consulting company based in Innsbruck, Austria. Todd A.
Mooradian is associate professor of marketing at the Col-
lege of William and Mary in Williamsburg, Virginia. Matzler
and Mooradian are also partners in IMP. Matzler and Bai-
lom are co-authors, with Dieter Tschemernjak, of Enduring
Success: What Top Companies Do Differently (New York:
Palgrave Macmillan, 2007). Comment on this article or
contact the authors through smrfeedback@mit.edu.
Reprint 49108.
Copyright © Massachusetts Institute of Technology, 2007.
All rights reserved.
Analytics can never trump the intuition of a thoughtful
executive, wrought by years of experience and accumu-
lated knowledge, tempered by emotional intelligence.
SLOANREVIEW.MIT.EDU

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