When should you trust your instinct? Jean Chatzky investigates
I was in my car the other day, fetching the dog from the groomer and listening to the generally excellent Pimm Fox on Bloomberg Radio, when I heard the following bombshell. Neil Barofsky, special inspector general for the Troubled Asset Relief Program (TARP) had issued a report on the bailout of Citigroup that said: “While there was consensus that Citigroup was too systemically significant to be allowed to fail, that consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria.” I thought perhaps I’d heard wrong, so when I got home, I went to the computer and checked with Bloomberg.com. Nope. There it was: The $45 billion paid to Citi in the form of a $25 billion chunk in October, 2008, followed a month later by a $20 billion one was – at least in some ways – ad hoc.
Now, I don’t know how overly critical to get here, considering how well (very) the TARP plan actually worked. But I know there are issues with relying on our guts for decision making purposes. One is that some of us may not have guts finely tuned enough to recognize what they’re saying to us. If you’ve ever hemmed or hawed over a decision, you know what I mean. Sometimes we just aren’t sure how we feel. (Cornell University Professor Alice Isen once told me the best thing to do in that situation is to flip a coin. Assign heads to one side of the decision, tails to the other. Then throw it up in the air and while it’s in the air, pay attention. You’re going to hope it lands one way or the other. That hope is your intuition talking.)
Another concern is a question of when relying on your gut is appropriate. Will it ever lead you astray? For that, I called David E. Adler, author of Snap Judgment, a book about the psychology of intuition. He explained that your gut tends to actually work for most decisions. Should you marry that guy? If your gut says yes, chances are it’s the right thing to do. “The more you cogitate over a decision like that, the worse it gets,” Adler says.
Where your gut doesn’t work is in quantitative decision making — anything, Adler says, where math is involved. In that case, your gut instinct may get you in the ballpark, but it isn’t precise enough. Then he used this example to prove the point:
Adler: “Say, you have a bat and a ball and together they cost $1.10. The bat costs a dollar more than the ball. How much is the ball?”
Me: “Ummmm, well I know it’s not a dollar. I can’t think this through when I’m typing.”
Adler: “Right, the answer is the ball costs 5 cents. But to get at that answer you have to stop and think hard. It’s not a snap judgment. Whenever you’re dealing with these decisions that involve numbers, you want to not trust your gut.”
Which brought me right back … of course … to Citi. There were plenty of numbers in that equation, weren’t there? Adler concurred, but there were lots of other things as well. The size of the problem was so large. There was little way of predicting the spillover effects if it were allowed to topple.
In fact, Adler – whose other area of expertise besides intuition (lucky for me) happens to be liquidity economics – noted that the academic literature doesn’t have a clear answer of what should be bailed out and what shouldn’t. “Unlike the bat and ball, there is no rigorous model that says this is the right way to behave. It was up to the Fed and Treasury to trust its [collective] gut. And you could argue that in this situation that was behaving rationally.”