Are You Biased, or Just Noisy…?

It is a truism that each of us is prone to cognitive biases in decision-making, and that being aware of this reality is at least one step towards mitigating and managing any potential negative outcomes from distorted judgements.

However, while the topic of bias has been extensively studied, and one can easily find “catalogues” of such biases online, the issue of “noise” in decision-making has been less noticed or explored.

So, the just-published book, “Noise: A Flaw In Human Judgment” (co-authored by Daniel Kahneman, Nobel Prize winner and author of “Thinking Fast and Slow”; Cass Sunstein a lawyer-scholar, also a prolific author; and Olivier Sabony, formerly of McKinsey) is worth consideration, as it is always useful to know more about how and why one’s decision-making process can be improved, and to be made aware of flaws or defects which may not be obvious.

For a start, bias is not the same as noise. The former refers to systematic deviations in judgments or outcomes- i.e., outcomes which all deviate in one direction; the latter to random scatters, or unwanted variability, amounting to a “lottery”. Both defects are potentially harmful and unfair; and cause mistrust, unnecessary costs and losses, and unfairness- one only has to think of justice systems. Noise undermines credibility.

And noise can take more than one form: “occasion noise”, when a decision varies because of a difference in external factors which should have no bearing; and “system noise” in which the same facts systematically produce different outcomes. In the latter context, the authors give an example pertinent to the (re)insurance industry. A large, un-named insurance company, in order to check the quality of its underwriters’ decision-making when setting premium rates, provided them with a series of sample cases to review and judge. Management was shocked to find that the same fact set produced outcomes in which the median rate suggested varied by up to 55%! Apart from the potential reputational risks, if such inconsistency became visible, there would almost certainly be a cost to the company itself in terms of revenues foregone.

Clearly, dampening noise is beneficial in any decision-making process, but that must be achieved without creating unrealistically rigid or complex systems that stultify effective human judgement when it is warranted, or de-humanize those subject to the outcomes.

What the authors suggest amounts to “decision hygiene” (a term which reminds us of Atul Gawande’s “The Checklist Manifesto”)- the use of guidelines, protocols and algorithms (being careful not to introduce covert biases) that provide the decision-maker with a number of easier “sub-judgements” that should help control for both bias and noise. In some cases, aggregating individual judgements can be helpful, as can compiling the views of disparate teams on different aspects of a complex problem- such as the cost/benefit analysis of a potential merger.

At Awbury, we have long been students of the decision-making process. Being able to make and implement decisions in a timely and effective manner is a competitive advantage, as long as one does not succumb to the delusion that one has somehow achieved “perfection”. The realm of (re)insurance will rapidly disabuse you of that!

The Awbury Team


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