Judgment, Luck, and Intuition

4 January 2007 at 1:26 am 5 comments

| Peter Klein |

Former guest blogger Lasse Lien asked recently how entrepreneurial judgment is different from luck. Harold Demsetz once asked the same thing about Kirzner’s concept of alertness (“The Neglect of the Entrepreneur, 1983”). In our work on entrepreneurship Nicolai and I have defined judgment in Knightian terms as decision-making when the range of possible future outcomes, let alone the likelihood of individual outcomes, is unknown. In Mark Casson’s formulation, judgment is needed “when no obviously correct model or decision rule is available or when relevant data is unreliable or incomplete.”

If judgment is more than luck, then what is it? How about “intuition,” another kind of decision-making without a formal rule or model? The January 2007 Academy of Management Review features Erik Dane and Michael Pratt’s “Exploring Intuition and Its Role In Managerial Decision Making.” Intuition is defined inconsistently across the literatures in psychology, philosophy, and management, and Dane and Pratt do a nice job summarizing and synthesizing these definitions. Their own concept of intuitions is “affectively charged judgments that arise through rapid, nonconscious, and holistic associations.” They write:

[O]f all the other ways of making judgments and decisions reviewed here, only the nonconscious use of heuristics and internalized patterns of information fall within what we all intuition. In contrast, we believe that rational decision making is highly dissimilar to intuition. The former involves the use of systematic procedures designed to thoroughly assess all pertinent information, evaluate costs and benefits, and ultimately make a decision based on conscious deliberation. . . . In short, it is highly analytic and relies on logical connections. Moreover, as we have discussed, rational decision making involves a completely different type of information p4rocessing system than the experiential system used in intuition. In brief, intuition differs from more rational models of decision making in that it is (1) nonconscious, (2) holistic, (3) associative, and (4) faster.

Dane and Pratt do not discuss behavioral economics, which attempts to model biases and heuristics using formal decision rules (not necessarily successfully). And I wonder, ultimately, how much this matters for entrepreneurship research. To economists such as Knight or Kirzner who are trying to understand the role entrepreneurship plays in the economy, the cognitive foundations of entrepreneurial decision-making by specific individuals are not all that important. In other words, we might not care about what judgment is, only what it does.

Update: Is intuition related to improvisation? Wynton Marsalis compares business to jazz.

Entry filed under: - Klein -, Entrepreneurship, Management Theory.

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5 Comments Add your own

  • 1. Joseph Mahoney  |  4 January 2007 at 11:55 am

    Pragmatically speaking, the Forrest Gump/Peter Klein view that: “judgment is, what judgment does” has its merits.

    And, of course, luck is like a box of chocolates ,,,, “you never know what you are going to get.”

    Herbert Simon’s research on problem-solving in the context of master chess players provides us with insights concerning some distinctions between luck and judgment. For example, Herbert Simon concludes that the development of good judgment through the development (and discovery) of superior heuristics is at the heart of intelligence.

    In his time, Bobby Fisher had superior judgment in the play of the game of chess.

    By the way, I was #1 chess board player in high school, but I stopped playing because chess is a game of judgment and not a game of luck. Similarly, Casey Stengel noted that he was a manager and not a ball player since baseball playing was a game of skill.

  • 2. Peter Klein  |  4 January 2007 at 12:09 pm

    Nerd alert! Nerd alert! I mean, “Thanks Joe!”

    Just for clarification, the Forrest Gump position isn’t my own, but rather my interpretation of Knight’s position. Similarly, I think Kirzner would say “alertness is what alertness does,” Schumpeter would say “innovation is what innovation does,” and so on. That is, the major contributors to the economic theory of entrepreneurship took a highly instrumentalist, or functional, view of the entrepreneurial act itself.

  • 3. Chihmao Hsieh  |  4 January 2007 at 4:47 pm

    Yeah, this is a topic that I could discuss for a while.

    I think most people would agree that the classic examples of ‘luck’ include ‘being at the right place at the right time’ and ‘finding a $5 bill on the sidewalk.’

    It’s probably more accurate to describe these as examples of ‘dumb luck,’ in the sense that you could be categorically ‘dumb’ and still see the opportunity when you’re at the right place at the right time, or when a $5 bill drops at your feet. “Hey Jim, look, a $5 bill fell right at your feet: What dumb luck!” Only if you’re ‘dumber than dumb’ would you not be able to take advantage of those opportunities.

    But the fact of the matter is that one requires applying his or her knowledge to discover the opportunities available even in these situations. For example, if I’m walking along, and a $5 bill drops at my feet, I *still* have to process in my mind that this is a piece of paper, that it has green markings on it, and then be able to recall (at least on a subconscious level) that I can buy stuff with it that makes me happier.

    I’m not totally crazy about the word ‘judgment’ but only because it’s often confusing whether people are referring to a process or an outcome. Nevertheless, judgment relates to either intuition or analysis. Both of these latter terms are terribly muddy in the literature. I prefer discussing long-term memory vs. short-term memory, respectively. Got a draft of a paper (not yet ‘working’ status yet) that addresses luck and human memory and how the word ‘alertness’ is potentially misleading… I was thinking either ETP or JAP, but now that AMR has accepted the term ‘intuition,’ maybe I’ve got something to send along after all…

  • 4. Peter Klein  |  5 January 2007 at 10:16 am

    Chihmao , hope you’ll share the paper with us when it’s ready for circulation….

  • 5. Chihmao Hsieh  |  6 January 2007 at 3:01 pm

    Peter , a lot on the plate but as soon as I can get it in decent shape, I’ll be sure to share! Thanks!

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