INTUITIVE AND RATIONAL FORECASTING

This article is about the use of intuition in forecasting. Since complete information about an event is not available and accurate analysis of a future event requires a lot of effort and time from the forecaster, it is not always possible to make fully rational decisions, sometimes you have to rely on intuition.

Both intuition and analysis are indeed valuable when forecasting in prediction markets, and one of the key advantages of a prediction market is that it uses both types of thinking. We tend to think of analytical approaches as more accurate, especially when making important decisions, and in many cases they are.

It is important for a forecaster to know when to rely on intuition and when to rely on analysis. But for the consumer of the forecast market, it is important to use both intuitive and analytical approaches. As a result, forecasts can be as quick, emotional, and human as they can be rigorous, logical, and quantitative.

How does intuition work?

Many scholars propose a dual process theory: decision-making processes are divided into intuitive (empirical or implicit) and analytical (rational or intentional).

In Blink: The Power of Thinking Without Thinking, Malcolm Gladwell (2005) describes two different approaches: blinking, when intuition is used, and thinking, when analysis is performed.

“The blink of an eye can be as valuable as months of rational analysis.

Intuition (or blinking) usually refers to the use of knowledge that is not explicit, and in popular culture can be described as “premonitioning” or “female intuition.

Intuition is also holistic, combining information from several sources and often requiring a leap in thinking based on limited information.

When should you use intuition rather than analysis?

The most important condition is expertise . If you are just starting to take your first steps in forecasting, your intuition about whether your forecast is accurate will not be successful — you have no prior knowledge on which to base a correct decision.

According to the study, it takes a surprising amount of knowledge and years of work in a subject area to develop accurate intuitive judgments. And during those years, repetition and feedback are essential.

For example, a TV show producer, in order to develop accurate intuitive judgments about new TV shows, must repeatedly participate in making decisions about new TV shows and receive quick and accurate feedback about whether those decisions were correct. Eventually, this repetition and feedback turns into intuitive learning and can be used to make quick and effective intuitive decisions about new shows.

The second condition has to do with the type of decision you are making. To facilitate intuitive judgment, the problem must be unstructured. An unstructured problem is one that lacks clear decision rules or few objective criteria for making a decision.

Finally, the third condition is the amount of time you have. If you only have a small amount of time to make a decision, intuition can be useful because it is faster than detailed analysis. This is especially true when there is very little information available to make a decision. When information and time are scarce, using heuristics such as intuition can often be just as effective as a rational approach.

Bottom line

Ultimately, perhaps we should use both intuition and analysis. There are times when intuition helps narrow down options, which can then be analyzed logically and rationally. Or vice versa: an initial detailed analysis may reveal several options that seem equally good, and it takes intuition to choose the right one. But before you decide to trust your intuition, ask yourself: am I an expert? Is the problem unstructured? And how much time do I have to choose?

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