M1-Assignment 3: Moneyball

HBR AT L A R G E

When to

How do business executives make crucial decisions?

Often by relying on their keen intuitive skills,

otherwise known as their "gut." But what

exactly is gut instinct and how does it work?

Scientists have recently uncovered

some provocative clues that may

change the way you work.

byAlden M. Hayashi

THE INTUITIVE INSIGHT that would saveChrysler in the 1990s came to Bob Lutz, then the company's president, during a week- end drive. On a warm day in 1988, Lutz took his Cobra roadster for a spin. As he raced along the roads in southeastern Michigan, he tried to relax, pushing aside what critics had been saying about Chrysler-that the company was brain-dead, technologically dated, and uninspired and that it lagged dan- gerously behind not only the Japanese auto- makers but also General Motors and Ford.

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HBR AT LARGE • When to Trust Your Cut

Ironically, Lutz found it difficult to enjoy himself precisely because he was finding the drive so pleasurable. "I felt guilty: there I was, the president of Chrysler, driving this great car that had such a strong Ford association," he says, referring to the original Cobra's Ford V-8 engine. In fact, Lutz's strong sense of corporate loyalty had earlier led him to remove the "Powered by Ford" plaques from his car. Still, the guilt needled him, and on this drive he began wondering about replacing the Cobra's engine with one from Chrysler. Per- haps then he could enjoy his beloved sports car in peace. But he quickly realized that Chrysler did not have a V-8 engine that was up to snuff. If he made the switch, the car would lose con- siderable performance."ChrysIer was way, way, way behind," he :.j remembers admitting to himself.

Soon Lutz's mind was racing. Didn't Chrysler have a powerful ten-cylinder engine in develop- ment for its new pickup truck? Could that be the answer? And, wait, wasn't Chrysler also building a five- speed, heavy-duty manual transmission for that truck? Why not co-opt those monster parts for a sexy, expensive, two- seat concept sports car that would be as revolutionary as the Cobra had been in the 1960s? Wouldn't that silence every- one who had written off Chrysler?

That Monday, Lutz leapt into action, enlisting important allies at Chrysler to develop a muscular, outrageous sports car that would tum heads and stop traf- fic. After seeing a full-size clay model of the car-later to become the Dodge Viper-Lutz was all the more deter- mined. But the naysayers were many. Chrysler's bean counters were arguing that the $80 million investment would be better spent elsewhere, perhaps to pay down the company's debt or refur- bish plants. The sales force warned that no U.S. automaker had ever succeeded in selling a $50,000 car. At the time,

Alden M. Hayashi is a senior editor at HBR.

Dodge cars were priced under $20,000, and customers were mainly blue-collar workers. But Lutz persevered, pushing the project forward with unwavering commitment. Amazingly, he had no

Your mind continually receives and processes information that you are not consciously aware of.

market research to support him, just his gut instincts.

The Dodge Viper became a smashing success, it single-handedly changed the public's perception of Chrysler, dra- matically boosting company morale and providing the momentum that the company desperately lacked, ultimately spurring its dramatic turnaround in the 1990s. In hindsight, the Viper was exactly what Chrysler (now Daimler- Chrysler) needed; it was the right car at the right time. But how could Lutz have been so certain about that?

Lutz, now CEO of Exide Technologies, the $3 billion manufacturer of car bat- teries, has trouble describing exactly how he made one of the most critical decisions of his career. "It was this

subconscious, visceral feeling. And it just felt right," he says. Lutz is not alone. In my interviews with top executives known for their shrewd business in- stincts, none could articulate precisely how they routinely made important

decisions that defied any logical analysis. To describe that

vague feeling of know- ing something without knowing exactly how or why, they used words like "professional judg- ment," "intuition," "gut instinct," "inner voice," and "hunch," but they

couldn't describe the pro- cess much beyond that.

Intrigued, I turned to leading scientists who have studied how

people make decisions. Although the inner workings of the human mind are a mystery that may never be solved, I found that recent re- search has uncovered some strik- ing clues suggesting that our emo- tions and feelings might not only be important in our intuitive abil-

ity to make good decisions but may actually be essential. Furthermore,

I was told, the type of instinctive ge- nius that enables a CEO to craft the per- fect strategy for usurping competitors could require an uncanny ability to de- tect patterns, perhaps subconsciously, that other people either overlook or mistake for random noise.

So, then, what exactly is your gut and how does it work? When does it tend to be right - and wrong? An explanation of how your intuition works may surprise you; it might even change the way you make decisions. Before that, though, comes a more basic question: why is your gut important in the first place?

An X Factor

Over the years, various management studies have found that executives rou- tinely rely on their intuitions to solve complex problems when logical meth- ods (such as a cost-benefit analysis) sim- ply won't do. In fact, the consensus is that the higher up on the corporate lad- der people climb, the more they'll need

60 HARVARD BUSINESS REVIEW

When to Trust Your Gut • HBR AT LARGE

well-honed business instincts. In other words, intuition is one of the X factors separating the men from the boys.

Ralph S. Larsen, chair and CEO of Johnson & Johnson, explains the dis- tinction: "Very often, people will do a brilliant job up through the middle management levels, where it's very heavily quantitative in terms of the decision-making. But then they reach senior management, where the prob- lems get more complex and ambiguous, and we discover that their judgment or intuition is not what it should be. And when that happens, it's a problem; it's a big problem."

What has exacerbated that problem is that many companies now find them- selves in increasingly turbulent waters. Thanks to rapid advances in technology (the Internet is a prime example), busi- ness models in some markets are chang- ing seemingly overnight and new com- petitors are emerging from nowhere. "Often there is absolutely no way that you could have the time to thoroughly analyze every one of the options or al- ternatives available to you," says Larsen. "So you have to rely on your business judgment."

Richard Abdoo, chair and CEO of Wisconsin Energy Corporation, agrees. "As we move to a deregulated market- place, we don't have this slow process of hearings and review and two years to make a decision. We now have to make decisions in a timely manner. And that means that we process the best in- formation that's available and infer ft"om it and use our intuition to make a decision."

Obviously, gut calls are better suited to some functions (corporate strategy and planning, marketing, public rela- tions, human resources, and research and development) than others (produc- tion and operations management and finance). But the top jobs at any organi- zation all require sound business in- stincts. J&J's Larsen uses an example to explain why: "When someone presents an acquisition proposal to me, the num- bers always look terrific: the hurdle rates have been met; the return on in- vestment is wonderful; the growth rate

is just terrific. And I get all the reasons why this would be a good acquisition. But it's at that point-when I have a tremendous amount of quantitative in- formation that's already been analyzed by very smart people-that I earn what I get paid. Because I will look at that in- formation and I will know, intuitively, whether it's a good or bad deal."

After 11 years at the helm of J&J, Larsen says that one thing his experi- ence has taught him is to listen to his instincts. "Ignoring them has led to some bad decisions," he notes. Adds Abdoo, "You end up consuming more Rolaids, but you have to leam to trust your intuition. Otherwise, at the point when you've gathered enough data to be 99-99% certain that the decision you're about to make is the correct one, that decision has become obsolete."

Many executives like Lutz, Larsen, and Abdoo have made multimillion- dollar decisions based on their gut in- stincts. How do they do it? A look at the biological basis of intuition may provide some insights.

What Is Your "Cut"? Imagine that you're walking in the woods and suddenly come across a large rattlesnake. What happens right before you're consciously aware of the danger? Scientists say that the image of the snake quickly passes from your eyes to your brain, where the information reaches your visual thalamus, which then relays it to your amygdala. A major component of your limbic system, the amygdala then begins sending instruc- tions to your body to increase your

president over another is a far subtler feeling that is infinitely more complex. But there are two important points.

First, your mind continuously pro- cesses information that you are not consciously aware of, not only when you're asleep and dreaming but also when you're awake. This helps explain the "aha" sensation you experience when you learn something that you ac- tually already knew. (This article may be eliciting that very reaction.) Henry Mintzberg, professor of management at McGill University and a longtime pro- ponent of intuitive decision making, says the sense of revelation at the obvi- ous occurs when your conscious mind finally learns something that your sub- conscious mind had already known. To distinguish between the two kinds of thought, Mintzberg and others have adopted the lay terms "left brain" for the conscious, rational, and logical and "right brain" for the subconscious, intu- itive, and emotional. (Although the two terms are gross simplifications of how the human brain actually works, they do provide a convenient shorthand.)

Many executives have learned to tap into their right-brain thinking by jog- ging, daydreaming, listening to music, or using other meditative techniques. "1 get most of my ideas while I'm taking a very long, hot, zoned-out shower in the morning," says Bob Pittman, presi- dent of America Online. Pittman also courts his intuitive skills by placing him- self in unfamiliar situations. When he was CEO of Six Flags Entertainment, he once worked incognito as a janitor at one of the amusement parks, and on

Our emotions and feelings might not only be important in our intuitive ability to make good decisions but may actually be essential

heart rate and blood pressure. At this point, though, your visual cortex has yet to confirm that the object you have en- countered is indeed a rattlesnake.

Of course, fear is a primal emotion, and the gut instinct that tells a CEO to nix a business deal or promote one vice

that day he had an epiphany that helped explain why Six Flags was having prob- lems with its janitors being surly to guests. The reason, Pittman realized as he swept the streets, was because man- agement had been ordering the janitors to keep the parks clean, and customers

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HBR AT LARGE • When to Trust Your Cut

were the ones who were making it dirty. "So we had to go back and redefine their jobs," says Pittman. "We said,'Your main job isn't to keep the park clean. Your main job is to make sure that peo- ple have the greatest day of their lives when they come to Six Flags.' Oh, and by the way, what would prevent customers from enjoying themselves? A dirty park."

Second, your brain is intricately linked to other parts of your body through an extensive nervous system as well as through chemical signals (hormones, neurotransmitters, and modulators). Consequently, some neuroscientists as- sert that what we call the "mind" is really this intertwined system of brain and body. This, then, helps explain why intuitive feelings are frequently accom- panied by physical reactions. When Michael Eisner, CEO of the Walt Disney Company, hears a good idea, for exam- ple, he says his body often reacts in a cer- tain way - he sometimes gets an unusual feeling in his stomach, other times in his throat, and other times on his skin. "The sensation is like looking at a great piece of art for the first time," he says.

But how exactly could Eisner's sub- conscious know that ABC's Who Wants to Be a Millionaire-a game show, on prime time, no less-would become a smash hit? In other words, what makes some people's right brain so smart?

The Importance of Being Emotional Scientists are far from the answer to that question, but recent research has uncovered some provocative clues. An- tonio R. Damasio, a leading neuroscien- tist at the University of Iowa College of Medicine, has been studying people who have suffered brain damage to a specific area in their preft̂ ontal cor- tices, where we process secondary emo- tions, such as sorrow aroused through empathy (as opposed to primary emo- tions, such as fear triggered by the sight of a snake). Such patients retain nor- mal function in many respects-their language and motor skills, attention, memory, intelligence-but they have trouble experiencing certain emotions. When shown photos of people injured

in gruesome accidents, for example, they feel nothing.

During his research, Damasio began to notice something peculiar; these patients also had difficulty making sim- ple, even trivial, decisions. In his book Descartes' Error, Damasio recounts one particularly bizarre incident in which he asked a patient to choose between two dates for his next appointment. The patient pulled out his engagement book and began going through the myriad reasons for and against each date, taking into consideration his previous commit- ments, the proximity of them, the pos- sible weather on the two days, and so on. After almost a half hour of listen- ing to this excruciatingly tiresome-yet perfectly rational and logical-analysis, Damasio chose a date for the patient.

To explain this phenomenon, Dama- sio contends that decision making is far from a cold, analytic process. In- stead, says Damasio, our emotions and feelings play a crucial role by helping us filter various possibili- ties quickly, even though our con- scious mind might not be aware of the screening. Our intuitive feel- ings thus guide our decision mak- ing to the point at which our con- scious mind is able to make good choices. So just as an abundance of emotion (anger, for example) can lead to faulty decisions, so can its paucity.

This point was echoed by Eisner. In my interview with him, he had great difficulty describing how his intu- ition worked. But when I asked about the possible role of emotions, his re- sponse was quick and emphatic: "Bal- anced emotions are crucial to intuitive decision making," he declared. To ex- plain further, Eisner cited the surrealist painter Marc Chagall's imagery of a horse and man, the former symbolizing our emotions and the latter our rational intellect"When Chagall drew paintings of a small horse and a giant man," Eisner said, "the horse was too small and couldn't get up on its feet. And when he drew a giant horse, the animal would throw the man off. But when Chagall drew pictures of the horse with the right

kind of simpatico with the man - that is, emotions and intellect in balance-then you have instincts that are proper."

A Pattern in Patterns General intuition is one thing, the busi- ness instinct that tells a seasoned ven- ture capitalist whether a start-up will succeed is another. Nobel laureate Her- bert A. Simon, a professor of psychology and computer science at Camegie Mel- lon University, has studied human deci- sion making for decades and has come to the conclusion that experience en- ables people to chunk information so that they can store and retrieve it easily.

The instinctive genius that enables a CEO to craft the perfect strategy could require an uncanny ability to detect patterns that other people either overlook or mistake for random noise.

In chess, for instance, Simon found that grand masters are able to recognize and recall perhaps 50,000 significant pat- terns (give or take a factor of two) of the astronomical number of ways in which the various pieces can be ar- ranged on a board. Associated with that knowledge is important information, such as possible offensive and defensive maneuvers that each cluster of pieces

62 HARVARD BUSINESS REVIEW

When to Trust Your Gut • HBR AT LARGE

might suggest. "Experts see patterns that elicit from memory the things they know about such situations," says Simon.

AOL's Pittman couldn't agree more. "Staring at market data is like looking at a jigsaw puzzle," he says. "You have to figure out what the picture is. What does it all mean? it's not just a bunch of data. There's a message in there." This is why Pittman routinely loads himself up with as much data as possible."Every time 1 get another data point," he ex- plains,"rve added another piece to the jigsaw puzzle, and I'm closer to seeing the answer. And then, one day, the over- all picture suddenly comes to me."

In his varied career, Pittman has seen many patterns at work. A cofounder of MTV, he rightly realized when he first arrived at America Online that the com- pany's single most important job was to continue building and establishing its brand-just as it had been for MTV in its early days. Pittman also pushed hard for AOL to continue moving away from a business model based on consumer subscriptions. (Previously, AOL had charged customers by the hour before going to a flat monthly fee.) The bigger bucks, Pittman knew, were in advertis- ing and e-commerce revenues, not in subscriptions. "Most people had been thinking about advertising as money coming out of people's media budgets. I wanted to take a broader view and de- fine advertising as what it really is: rent- ing our consumer relationship to unaf- filiated third parties for money." That change in thinking was a masterstroke, enabling AOL to move to a multibilHon- dollar revenue stream in just a few years. How could Pittman have intuited that? Perhaps he was influenced by his previous experience at Six Flags Enter- tainment: the profits from amusement parks derive mainly from selling mer- chandise and refreshments, not from the admission tickets.

Various studies of experts in diverse fields-parole officers predicting which criminals are likely to break the law again, doctors making diagnoses, school admissions officers predicting which stu- dents wil I succeed, and so on - have con- firmed that professional judgment can

often be reduced to patterns and rules. In fact, Robyn M. Dawes, a professor in the department of social and decision sciences at Camegie Mellon University, has uncovered something surprising in his extensive review of these studies: sta- tistical models based on rules typically outperform human experts. For one thing, Dawes says, the models are more consistent: they never suffer from a bad breakfast or a fight with a loved one.

Although little research has examined experts in the business field, several studies confirm Herbert Simon's con- tention that "intuition and judgment are simply analyses frozen into habit." In one experiment, for example, statis- tical models using numerous financial ratios (cash fiow to total debt, for exam- ple) were more accurate in predicting whether a business would fail than bank loan officers making the same judg- ments. In a different study, statistical models performed as well as two types of retail experts: professional buyers forecasting the catalog sales of different fashion items and brand managers pre- dicting the redemption rate of discount coupons.

'7/7 general management, people with varied and diverse backgrounds are, all other things being equal, going to probably be more valuable and will learn faster because they'll recognize more patterns"

According to Simon, when we use our gut, we're drawing on rules and patterns that we can't quite articulate. "All the time," he says, "we are reaching conclu- sions on the basis of things that go on in our perceptual system, where we're aware of the result of the perception but we're not aware of the steps." Simon claims that intuition is merely those steps, that in-between mechanism that

is mysterious only because we don't yet understand how it works. According to him, even extremely sophisticated pro- cesses, such as a CEO's deciding whether to acquire a company, can in princi- ple be broken into patterns and rules. "We've been working on expertise of one kind or another since the early 1970S,"says Simon,"and wherever we've turned, we found that what distin- guishes experts is that they have very good encyclopedias that are indexed, and pattern recognition is that index."

Cross-Indexing Truly inspired decisions, however, seem to require an even more sophisticated mechanism: cr(«5-indexing. Indeed, the ability to see similar patterns in dis- parate fields is what elevates a person's intuitive skills from good to sublime.

Remember Bob Lutz's decision to build the Viper? Today, he justifies that gutsy move by using an analogy."When you're going too slow in an airplane," he explains, "your aerodynamic drag builds up because the nose of the air- plane is pi^sitioned too high and you can actually get to the point where, even at full power, you can't get the airplane to climb anymore. So your only solu- tion is to drop the nose and trade off some altitude to gain speed." Similarly, Chrysler in the late 1980s had lost so much momentum that it was in danger of stalling. To prevent that, the conven- tional wisdom called for cost cutting to gain altitude. But Lutz knew better. "People were saying, 'You're low and slow and you're struggling for altitude. What an incredibly bad time to drop the nose and dive some more by spending cash on a frivolous vehicle like the Dodge Viper,'" he remembers. "But the Viper gave us the forward momentum we des- perately needed, both internally and ex- ternally with the financial community, the automobile magazines, and all of those constituencies that create the psy- chological climate in which your com- pany either prospers or doesn't."

Lutz, a former Marine fighter pilot, says that when he first made the gut call to build the Viper, he was not con- sciously aware that an aerodynamic

FEBRUARY 2 0 0 1 63

HBR AT LARGE • When to Trust Your Gut

analogy held the answer to Chrysler's plight. But it's entirely conceivable, he adds, that on a subconscious level his in- tuition made the connection, "i think I've always had this ability to think lat- erally," he says. "If I'm learning some- thing specific, I find it very easy to relate it to analogous situations in completely unrelated fields. As long as I understand a basic mechanism, I can usually apply it to a whole lot of other things."

Obviously, the power of cross-indexing increases with the amount of material that can be cross-indexed. Says Lutz, "I find that in general management, peo- ple with varied and diverse backgrounds are, ail other things being equal, going to probably be more valuable and will leam faster because they'll recognize more pattems." Lutz himself grew up in Europe and has a varied background that is part academic, part military, and part business. Eisner agrees that good intuitive skills must summon the entire mind. "When you see a gas station sign or a certain formation of the clouds," he says, "reams of historical information

about yourself that you remember from when you were a child can pop into your mind. Gut instincts are the sum total of those experiences-millions and millions and millions of them. And that sum total enables you to make reason- able decisions."

Know-and Check-Thyself That said, executives like Lutz and Eis- ner will be the first to admit that their instincts are often plain wrong. The fact is that various traits of human nature can easily cloud our decision making. For example, we will often take unnec- essary risks to recover a loss-the classic gambler's syndrome. Another potential pitfall is our tendency to see pattems where none exist, what statisticians call "overfittingthe data."

That our gut instincts are often wrong is exacerbated by the factors that pre- vent us from realizing just how faulty our intuition can be. First is a tendency toward revisionism: we frequently re- member when we didn't trust our gut and should have, while conveniently for-

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getting when we were fortunate to have ignored our instincts. Then there's the self-fulfilling prophecy: when we hire or promote someone, for instance, we con- sciously or subconsciously make extra efforts to ensure that person's success, in the end justiiying our original decision but obscuring whether our choice was actually a good one.

A dangerous ingredient in this mix is our tendency toward overconfidence. Various surveys have found that we overestimate our ability in just about everything-driving, being able to tell which jokes are funny, distinguishing between European and U.S. handwrit- ing, and so on. Take, for example, our ability to tell when others are lying. Paul Ekman, a professor of psychology at the University of Califomia, San Francisco, has found that we are actually a lot less capable than we think - most of us have only a 50-50 chance of detecting a strang- er's lies. The main problem, Ekman says, is that many of us never really find out whether our judgments are accurate, and this lack of feedback is pernicious. If we don't even know we've made mis- takes, we can't leam from them, and this blissful ignorance leads us to gain un- warranted confidence in our abilities.

To avoid such pitfalls, many top ex- ecutives seem to possess a powerful self-checking mechanism."! am acutely aware of my decisions, and I'm much more aware of the bad decisions that I've made than the good ones," asserts Larsen. Abdoo, the Wisconsin Energy CEO, specifically sets aside about eight hours every week for riding his Harley motorcycle, walking, and working in his basement shop."During those refiective times,"he says,"I often rehash decisions I've made. And when I do, I frequently learn something that helps me when I'm confronted with similar situations in the future."

Such self-assessment can be contin-

ual throughout the decision-making

process. Says Eisner,"! often sit back and

ask myself: why are we doing this, and is

it right for the company? Are we mak-

ing this acquisition for the right reasons,

or do we just want some initial good

press in the Wall Street Journal?" Not CO-

H A R V A R D BUSINESS REVIEW

incidentally, Daniel Goleman, a pioneer in the field of emotional intelligence, lists self-awareness-people's ability to recognize their own moods, emotions, and drives -as one of the key criteria for effective leaders.

To see this self-checking mechanism in action, consider how Lutz avoided making a crucial mistake with the Viper project. "When I saw the initial design of the car, 1 was disappointed because

"Don'tfall in love with your decisions. Everything's fluid. You have to constantly, subtly make and adjust your decisions."

I had expected something that would more closely resemble the original Cobra," he recalls. But soon Lutz be- came aware that his personal bias for the Cobra was tainting his gut reaction. "I then realized that, much as I liked the Cobra, we couldn't do that car again or it wouldn't have been a Chrysler car," he says. So Lutz in this case went against his instincts and approved the initial de- sign, which became the successful sig- nature look of the Viper.

Because self-checking and feedback are crucial for sound intuitive decisions, some organizations have made these processes part of the culture in execu- tive suites. Top managers at companies like Johnson & Johnson routinely solicit the opinions of others when faced with tough choices. Says Larsen, "Whenever I have this uneasy feeling about a deci- sion we're about to make, for example, about a new product or a major organi- zational change, 1 will often ask other trusted advisers who may not have been in the original discussion."The goal is to get to the root of the decision maker's uneasiness. "Then all of a sudden," he says,"the light goes on." And this is why, Larsen adds,"in our senior management group, we say we don't really make de- cisions, we extrude them."

But perhaps the greatest power of In- tuitive decision making coupled with continual feedback is that the process can be honed into an effective manage-

ment style for quick action. Pittman is a leading practitioner. "Probably more than half of my decisions are wrong," he explains."But if I have quick decision making, when I inevitably make the wrong decision, 1 can quickly change it to something else. And, therefore, over time I will have more right decisions working in our business than wrong ones." For example, Pittman might take a particular course of action based on

certain assumptions (perhaps a pattem he thinks he sees); but he'll quickly change that deci- sion when new information contradicts some of those as- sumptions (that is, perhaps the "pattem" really wasn't a pattem after all). Pittman, who is ex-

pected to assume a key position in the scheduled merged operations of AOL and media giant Time Wamer, has this final piece of advice, culled from his years of experience in making gut calls; "Don't fall in love with your decisions. Everything's fiuid. You have to con- stantly, subtly make and adjust your decisions."

Since my interview with Pittman and other executives, I have found myself trying to make and tweak decisions quickly based on my gut feel. And I no longer attempt to squelch my emo- tions during the process, although I vig- ilantly strive to discem the underlying reasons for those feelings. Even with lit- tle practice, I do think 1 have become slightly better at making smart choices, and I strongly believe that people can substantially increase their decision- making prowess by tapping more into the right brain. Interestingly, though, my gut tells me that I will more than likely never reach the kind of intuitive genius that led Lutz to build an outra- geous, expensive sports car when con- ventional logic dictated otherwise. But, then, perhaps this helps explain why so many companies fail to build Vipers when they need to, because not every executive is blessed with the exquisite instincts of a Bob Lutz. ^

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