Special thanks to guest author, Pascale Hansen
“Don’t let the noise of others’ opinions drown out your inner voice. And most important, have the courage to follow your heart and intuition”.
Intuition refers to the brain’s process of interpreting and reaching conclusions about phenomena without conscious thought. It’s usually assumed that this process draws on the mind’s memories, integration of emotional experiences, conditioning and the distortions and cultural biases of the subconscious.
As the growing amount of choices facing executives and the data requiring their analysis multiples, it leaves less time for thorough fact gathering and weighing of alternatives and intuition seems to offer a quick alternative. A study by Christian & Timbers showed that 45 percent of executives used their “gut feel” in making capital allocations although will claim they use objective methods such as net present value because generally rational reasoning will be better received than subjective assessments.
The results of intuitive decisions can be massively successful or immediate failures.
In 1992, Stefan Pierer became the CEO of KTM, a large manufacturer of off-road motorcycles in Austria. He took the company from bankruptcy to cash flow positive in two years and then made an intuitive decision that had people inside and outside the company questioning his sanity. He decided to enter the industry of street motorcycles, a new industry his company had no expertise and which he knew nothing about. He made the decision simply because that’s what his gut told him. The risky decision paid off. KTM’s entry into the street bike segment paved the way to becoming the second-largest sport motorcycle manufacturer with 15 years of 25 percent revenue growth. By 2006 KTM had 29 percent market share of the street bike segment. Pierer was quoted as saying: “When it comes to really serious business decisions I ultimately rely on my intuition”. In the same vein, Fred Smith created Federal Express, Michael Eisner heard a pitch for an offbeat game show and created Who Wants to Be a Millionaire? George Sonos sensed a big shift in currency markets and made a billion dollars.
I think the reason such tales have become business legends is that we want to believe in the allure of intuition and have inspiring leaders as shining examples of an easier business life. It’s so much more interesting than the day-to-day tasks in business of creating spreadsheets and defending income statements. Steve Jobs-esque intuition that disrupts an industry seemingly raises business decision making to an art form. It also gives us hope that a vision or feeling can lead to an achievement without extensive planning and mind-numbing number crunching.
Our desire to believe in the wisdom of intuition blinds us to the mundane realities of business decision making. It’s compelling to praise successful intuitive decisions as signs of great leadership and the unprofitable, intuitive decisions as signs of weak leadership. We remember the examples of success quoted above, but conveniently forget all the ones that bombed.
Fedex’s Fred Smith was also responsible for the quick death of Zapmail (a fax transmission network). Michael Eisner was also responsible for The Country Bears, Treasure Planet and the opening of EuroDisney. George Soros lost a fortune speculating in Russian securities in the late 1990s and lost another fortune betting on tech stocks in 2000.
If there’s a 50-50 chance of success or failure using intuition to make a business decision, what’s the best approach? According to research testing intuition versus analytical decision making, Michael Pratt of the Boston College Carroll School of Management, Erik Dane, of Rice University and Kevin W. Rockmann of George Mason, found that the success rate of intuitive decisions goes up when people have in-depth knowledge of the subject, also referred to as domain expertise.
Pratt, an expert in organizational psychology, said the findings should help companies understand intuitive decision making by senior management and employees alike. According to Pratt, “If you’re working in an industry where you’ve risen through the ranks, your domain expertise will likely better serve an intuitive approach. If you gained your expertise in a different field, you may not have the background to rely as strongly on your intuition”.
Other research suggests that intuitive decision making is really one’s ability to recognize patterns at lightning speed unconsciously and is an especially important trait for complex decisions. Complex decisions bring into play a process in which knowledge, experience and emotions are linked (intuition).
Research has found that people who consistently make good intuitive decisions have domain expertise as well as experience through their curiosity, openness and propensity to seize opportunities.
While the study of intuition and its benefits are relatively new, studies reveal that one needs at least 10 years of domain-specific experience to develop the gut feeling to make good intuitive decisions and that senior executives at the highest level make more intuitive decisions than senior executives at the middle and lower levels. Owners of small businesses make about the same number of intuitive decisions at the most senior executives of large companies.
In addition to domain expertise, a network of peers that allow for open discussions fosters good decision making and as does emotional intelligence. According to psychologist Daniel Goleman, 90 percent of the differences between top-performing and average-performing senior executives can be explained by emotional intelligence which in essence means being able to recognize and interpret one’s emotions.
A healthy dose of curiosity and seeking new opportunities is another key component to successful leadership decisions and focusing too much on risks is a slippery slope to the bottom. As management guru Peter Drucker wrote, “Positive results can only come about if senior executives consistently exploit opportunities. Thinking and acting in an opportunity-oriented way is a prerequisite for striking new paths. Striking new paths is a prerequisite for gathering experiences. And intuition needs experience”.
Peter Drucker also cautions against relying too heavily on intuition, “I believe in intuition only if you discipline it. The “hunch” artists, the ones who make a diagnosis but don’t check out the facts, with what they observe, are the one who kill businesses”.
In short, the best approach for senior executives and business owners to take when making complex decisions is to evaluate their gut instinct against the analytics, weighing different alternatives before taking action and always being open to new opportunities to create strategies that distinguish them from the competition to stay on a profitable path.
Pascale is a part of Incrementa’s extended family and a seasoned finance professional. She’s passionate about helping business owners decrease their tax bill and increase their cash flow. Connect with her.