Think Twice: Here’s When to Make (and Not Make) Gut Decisions

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The question of whether to trust one’s own gut or to painstakingly analyze any given problem has found different answers amongst different people and in different situations for centuries. On one hand, there is certainly such a thing as “paralysis by analysis.” I myself have seen numerous cases of wannabe real estate investors spend an enormous amount of time (and money) learning, only to never actually buy a property. You can even spot some “seminaraholics” at many events who have been to countless bootcamps and the like but have not locked down a single deal.

Furthermore, as the famous saying goes, “time is money.” So even if a detailed analysis would yield a better result, it’s not necessarily the better course of action because the time spent on such analysis might not be worth the cost.

But gunslingers who just go with their intuition have been known to make plenty of mistakes, including some very large ones. WeWork’s former CEO and certifiable nutjob Adam Neumann was able to convince SoftBank’s CEO Masayoshi Son to invest $4.4 billion in his wildly over-valued company during a 28-minute car ride to the airport. Needless to say, that gut decision didn’t play out too well.

Thus, we’re left with a conundrum, should you trust your gut or do a detailed analysis? There is no perfect answer, but a deeper dive (or detailed analysis, if you will) can offer some helpful guidelines. 

The Power (and Danger) of Human Intuition

As should go without saying—the more experience you have in something, the better your intuition is likely to be. But moreover, for any small decision, you should go ahead and use your gut. Should you install a ceiling fan or regular light fixture in this bedroom? Don’t overthink it. Decision fatigue is a real thing too. Just decide and do it.

That being said, you should be under no illusions about how useful your gut can be. A series of four studies from Harvard had the following results, “The first determined that most people believe that intuition is a better guide than systematic thinking to accurately infer other’s thoughts and feelings. The other three studies found that the opposite is actually true.” 

With hiring, for example, trusting your gut has a very poor track record. Legendary former CEO of General Electric, Jack Welch, figured about 25 percent of his hires were “A players” until he implemented a topgrading approach developed by Brad and Geoff Smart. This, in turn, raised that number to 50 and then 80 percent. 

As Geoff Smart put it in his great book Who,

“Forgers can pass off fake paintings as real ones to the time-pressed buyer, and people who want a job badly enough can fake an interview if it lasts only a few minutes. Gut instinct is terribly inaccurate when it comes to hiring someone. If you extend an offer based on a good gut feel, you are going to have a stomachache!”

At the same time, your gut instinct can reflect a wide variety of experiences and knowledge that your analytical mind cannot always properly articulate. One great illustration was given by Malcolm Gladwell in his book Blink when describing the decision-making expert Gary Klein’s investigation into how a lieutenant firefighter narrowly averted a catastrophe.

“The fire was in the back of a one-story house in a residential neighborhood, in the kitchen. The lieutenant and his men broke down the front door, laid down their hose… dousing the flames in the kitchen with water. Something should have happened at that point: the fire should have abated. But it didn’t. So the men sprayed again. Still, it didn’t seem to make much difference. The firemen retreated back through the archway into the living room, and there, suddenly, the lieutenant thought to himself, there’s something wrong. He turned to his men. ‘Let’s get out, now!’ he said, and moments after they did, the floor on which they had been standing collapsed. The fire, it turned out, had been in the basement. 

“’He didn’t know why he had ordered everyone out,’ Klein remembers… for the next two hours, again and again [Klein] led the firefighters back over the events of that day in an attempt to document precisely what the lieutenant did and didn’t know. ‘The first thing was that the fire didn’t behave the way it was supposed to,’ Klein says. Kitchen fires should respond to water. This one didn’t. ‘Then they moved back into the living room,’ Klein went on. ‘He told me that he always keeps his earflaps up because he wants to get a sense of how hot the fire is, and he was surprised how hot this one was. A kitchen fire shouldn’t have been that hot. I asked him, ‘What else?’ Often a sign of expertise is noticing what doesn’t happen, and the other thing that surprised him was that the fire wasn’t noisy. It was quiet, and that didn’t make sense given how much heat there was.’”

“In retrospect all those anomalies make perfect sense. The fire didn’t respond to being sprayed in the kitchen because it wasn’t centered in the kitchen. It was quiet because it was muffled by the floor. The living room was hot because the fire was underneath the living room, and heat rises. At the time, though, the lieutenant made none of those connections consciously. All of his thinking was going on behind the locked door of his unconscious… The fireman’s internal computer effortlessly and instantly found a pattern in the chaos.”

Had they sat around analyzing this situation for just a few seconds, they would have all died.

Now I should admit that I find Gladwell to be a rather frustrating intellectual who’s much better at asking questions than answering them. Blink goes back and forth between examples of one’s gut intuition working perfectly and then backfiring spectacularly. It’s been said that the book’s thesis might as well be “Always trust your gut except when you shouldn’t.”

In fairness, though, Gladwell tries to resolve this conundrum late in the book,

“One of the questions that I’ve been asked over and over again since Blink came out is, when should we trust our instincts, and when should we consciously think things through? Well, here’s a partial answer. On straightforward choices, deliberate analysis is best. When questions or analysis and personal choice start to get complicated—when we have to juggle many different variables—then our unconscious thought processes may be superior.”

Ironically, as Gladwell himself mentions, this is the opposite of what many other experts say. For example, The Harvard Business Review has a piece emphatically stating, “Don’t trust your gut.” It points out that “The most dangerous of these flaws, when it comes to intuition, is our deep-seated need to see patterns” and thereby, “the more complex the situation, the more misleading intuition becomes. In a truly chaotic environment—where cause and effect no longer have a linear relationship—the last thing you want to do is try to apply patterns to it.”

In other words, Gladwell thinks you should trust your gut when things are complex and not when they are straightforward, and The Harvard Business Review thinks you can (maybe) afford to trust your gut when things are straightforward but not when they are complex.

So, what should we do?

How to Use Your Gut

As noted above, the first series of events you should always use your gut for are simple and relatively unimportant decisions. Work on trying to make small decisions quickly and not overthink them. Mexican or Italian food? Which movie to watch? What color backsplash to install? Just decide and go for it. It’s not worth the cost to deeply analyze such things.

After that, I would tend to see your gut as having two key uses. The first is when something just feels really wrong. If it feels right, but a detailed analysis doesn’t support it, I would still tend to lean away from it (unless, of course, it’s low cost, say, like buying Dogecoin when it was a hundredth a penny).

This is what happened with the firefighter example above. Something felt really wrong even though the lieutenant couldn’t put his finger on it. In such cases, you should withdraw. In fact, Gladwell opens his book with a similar example of an art historian’s gut feeling an extremely expensive statue a museum was about to purchase was fake, which it turned out to be.

If something feels really wrong, I would stay away. 

The second use is when your gut says something—good or bad—you should at least investigate it. See it as a litmus test. It’s not the answer, but it does act as a guide to where to spend your mental energy.

Recently, I had a feeling we were spending too much on HVAC, and despite being told this was the price, I decided to dig into it and found we could save a substantial amount by switching manufacturers even though that manufacturer is considered to be on the higher end. Many years ago, our previous property manager kept telling us our turnovers were really large, and that’s why they were costing us so much. After a while of this, it just didn’t feel right. So, my brother went and investigated some of the units himself and found her explanations to be faulty, to say the least. She didn’t last much longer as our property manager.

Another time we were told by a third-party property manager that internet advertising didn’t work for an apartment we had in a less desirable area. We naively accepted this explanation for some time before figuring out that it was nonsense when we took back the building to manage ourselves after over a year of low occupancy. 

Every real estate investor (and business owner, for that matter) has numerous experiences of slapping their forehead in regret when realizing they were overspending or under-utilizing a potential resource. In hindsight, it always seems like it should have been blatantly obvious. 

But things move fast in business, and there are lots of fires and other problems to solve. (Quadrant 1 activities, as Stephen Covey would say.) It’s easy to let such issues slide even if your gut says something is off. 

This is especially true with bad employees who, while being bad at their job, are unfortunately often quite good at gaslighting their supervisors. For example, we had one rehab manager almost a decade ago who was taking kickbacks. We only found that out after he left, but it was becoming clear that his projects were coming in too expensive, and he was oddly selective about which contractors he wanted to use, even if it didn’t make sense. Taking his word for it when our guts said otherwise cost us dearly.

This applies to the opposite as well. I had a good feeling about Bitcoin back in 2012 when it was worth less than a dollar, even though I didn’t really understand it. Well, I probably should have made the time to figure it out…

On the other hand, our decision to move to Kansas City to open a second branch back in 2010 felt right. Once we looked at the market and the opportunity to get back into buy and hold in a more cash flow friendly market instead of Eugene, Oregon, where we were, it made sense, and so we pursued it. 

Conclusion

In conclusion, your gut is an important but dangerous tool. Acting like a gunslinger and just relying on your intuition is bound to get you into trouble. But discarding it entirely will waste time and often bog you down in paralysis by analysis. 

Work on allowing yourself to quickly rely on your intuition for small decisions and hone it as a warning beacon to further investigate issues if they feel wrong (or right). But make sure to use an analytical approach when investigating whatever intuition you had as that left to itself. Your gut will often lead you astray. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.