A world of ‘rational actors’, would look something like a utopia of supra-human efficiency and a world free of inaction or perceived sub-optimal decision making. Individuals, almost at an instance being able to calculate the benefits and costs of a single action taking account of all available and necessary information without any judgement bias nor occasional mood-swings.
This is of course, not the world we inhabit, very far from it. Homo-Economicus, the rational self-interested actor, is an almost contradiction of how Humans behave. Daniel Kahneman and his late research crusading partner Amos Tversky negated this almost counterfactual theory of human judgement, in favour of an encompassing view of the many errors we make in our forecasting largely because of our almost formulaic bias and behavioural regularities.
Kahneman and Co’s new book, ‘Noise: A Flaw in Human Judgement’ takes aim at the problem that has plagued our decision-making process, ‘Nosie’ or the unwanted variability/spread of “correct” answers. Throughout this book, the authors offer up many anecdotes and studies done in finance, insurance, medicine, judicial sentencing, and many more to show the existence of noise on an institutional/systematic scale, the results are truly unfathomable.
Variability is a good thing. Consistent uniformity in our actions and hobbies would be considerably boring and counterproductive to our optimal enjoyment in our day to day lives. We want variability in our choices and our pleasures, like Art forms, Films, Music, political persuasion and even whether to get shellfish on date or not. That variability should be cherished and un-blemished by consistency, but in many other areas we desire and must strive for consistent judgement.
We want congruous decisions in medical diagnosis, judicial sentencing, economic projections, interviews for employment and risky business decisions. In such situations, consistency equals rectitude in those actions, along with the acknowledgement and elimination bias with distinct processes, a correct answer can be arrived at. Inconsistency in judgements like these can be extremely costly in these cases, and therefore considerable effort is put into maintaining such consistency.
Despite all this effort to find and eliminate bias, noise on the other hand, according to Kahneman & Co, goes largely unrecognized in actions. The book provides many examples in everyday working life where noise goes totally unobserved, for example, why do two Doctors give completely different diagnosis to the same patients or why do judges give strict or lenient sentences to the same crime but with different individuals.
Such variability in judgements should be identical, Judges should be interchangeable, assessing investments by analysts should be the same, each analyst should again, be interchangeable. The most common source of this variability probably comes down to the fact that people view the world in very different ways, something which Kahneman calls ‘pattern noise’.
Judges will be harsher in one case and more easy in an other case, analysts can be optimistic or pessimistic etc. Though within pattern noise there can be further defining cases, as previously stated, some judges being more severe and others being more easy on the exact same case, is called ‘level noise’. Judges may also arrive at different decisions due to different mental states, are they going to be more severe before lunch or after, in the morning or in the evening, is it hot out or cool weather? all such factors may impact judges to give differing sentences to the same case, otherwise known as ‘occasion noise’.
Wherever there is judgement there will undoubtedly be noise, and usually a lot more noise than we think. Judgements should be treated like unit measurements; in that they should be completely independent of each other. Often a firm or even a government institution will have groups forming a new policy or analysing a new investment together, that’s all well and good, but a lot of information can be lost under this type of decision formulations.
Kahneman & Co propose that the best way to create a good ‘decision hygiene’ within such group formats by making sure that each member comes prepared with their individual judgement and then start the wider discussion. If workers, friends, and colleagues cannot form prior judgement, they will start to influence one another in such group discussions, that is very noisy.
A firm with many resources can afford to get many outside specialists to help in reducing noise, but as individuals, other individuals’ opinions are very important. In keeping with decision hygiene, its important to maintain that such other opinions are completely independent of each other’s. This process goes further, analyse a problem or actions defining characteristics independent of each other, comparatively rather than absolute analysis is much more efficient according to Kahneman.
As individuals, we have very little control in our own actions to try and deal with noise. When it comes to noise, the outcome is largely unimportant, but the process, is. People can be very overconfident in their ability to control outcomes. Optimism can be an intense bias and can result in unwanted variability, Kahneman uses the example of traders being very confident in their ability to get out in time of stock market bubbles, which usually result in costly outcomes due to very noisy decisions.
Confidence does not always show competence, and we are all very prone to other people’s confidence, politics is full of this phenomenon, but in general it is an important variable to account for. The best policy is always to get another independent opinion. We all hopefully practice a decent level of hygiene, so lets go one step further and practice good decision hygiene, and of course get Kahneman’s book, you won’t regret it, but of course I am biased, so get another opinion!.
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