The Future of the Gut Call is Here

What does it take to earn a salary of $100 million each year? There aren’t a lot of salaried employees who can answer that question but Andrew Hall is one of them.

Hall was a talented trader and knew his way around the oil market having served a long stint with BP. He had an MA from Oxford, an MBA from France’s leading business school INSEAD, and he had interests in contemporary art, among other things. Hall was employed by Citibank and, in 2008, earned a cool nine-figure salary trading oil as part of their commodities trading division, Phibro. And how?

By trusting his gut.

Back in 2003 Hall reviewed the oil markets and concluded that oil should be trading at a higher price than it was. At the time a barrel of oil was only around $30 and almost everybody who looked at the market thought that this was where the price would stay. The US was coming out of a recession, there was a lot of supply of the ‘black gold’, and Hall was almost alone in thinking that this was unlikely to last — and he was alone in thinking that the price would shoot back over $100 a barrel anytime soon.

Hall trusted his gut and started buying up long-date oil-futures contracts that would only pay off if the price of oil topped $100 a barrel within five years. With the rest of the market thinking he was wrong he could buy the contracts cheaply. For other oil traders, Hall was making bad bets: if the price of oil didn’t more than triple in just a few years then his contracts would expire and every dollar he had sunk into them would be lost.

For a long time, it didn’t look good. In 2006 the average price per barrel was $58.30 and in 2007 it was $64.20 — higher, but still a long way from $100 and Hall’s pay off.

And then in 2007 the price of oil shot up. In January 2007 it was $69.45 and by June it was $81.75. In September it was $94.62 and then, in October, the price of a barrel of oil hit $108.94.

Hall’s gut call paid off to the tune of more than half a billion dollars and, with a contract that guaranteed him 20% of his trading wins, he walked away with a $100 million personal payday.

While Andrew Hall is an example of how intuition can lead to enormous rewards it’s important to recall that his intuition only paid off because the intuition of all those other traders failed. Some hold up Hall’s intuition as the sign of a truly talented individual but the history of business is littered with stories of equally intelligent, equally talented people making gut calls that just didn’t pay off. There’s Kodak, for example, which invented the digital camera and then decided not to take it to market and concentrate on traditional film cameras instead — they filed for Chapter 11 in 2012. Blockbuster CEO John Antico famously laughed Netflix out of his office in the year 2000 - why would he pay $50 million for something that he thought could only ever be a niche player in home entertainment? Netflix made nearly $7 billion last year, Blockbuster was bankrupt in 2010.

Then there’s George Bell, the then-CEO of Excite.com who was offered a chance to buy a company with the strange name ‘Google’ in 1999 for a million dollars. Bell said no and Google, really needing the cash, came back and said they’d settle for $750,000. Going with his gut, Bell said no again. Today Excite continues to exist and Google’s market capitalization is more than half a trillion dollars.

Let’s be clear here: no one gets to the C-suite of a company like Kodak, Blockbuster, or Excite without having a history of successful decisions behind them. Their intuition about the market and its direction is likely a big part of what’s led them to success. But the problem with relying on intuition to make decisions is that it can sometimes fail you. For every Andrew Hall there are dozens, even hundreds of others who trusted their gut and lost — and sometimes lost it all.

We shouldn’t seek to replace the intuition of decision makers with massive flows of data or delegate decisions out to machines that claim to be better than humans at getting things right. Instead, we should encourage decision makers to augment their intuition with technology that can make sense of the complexity of modern businesses. At CoSMo we’ve already seen the benefits of this augmented intuition when some of France’s biggest companies embraced our technology and optimized strategies in domains as diverse as energy, transport, urban planning, crisis management, and biopharmaceuticals.

We’ve never sought to replace the intuition that traders like Andrew Hall use to bag that $100 million pay check and we never will. The future of the gut call is augmented intuition — and that’s what will empower the next generation of business leaders to leave their mark.