CEB HR Podcast Transcript
Kahneman, Daniel
SPEAKERS
Scott Engler
Daniel Kahneman
Scott
Welcome again to the CEB Talent Angle. I’m Principal Executive Advisor
Scott Engler, host of the show where we talk about everything talent
related. Today, we’re going to be getting into the foibles and the mindset
of talent and lack of alignment in organizations and problems with decisionmaking.
We have no better steward for our tour here than Daniel Kahneman, who is
best known for winning the Nobel Prize in Economics despite, as he says,
never having taken a course in Economics. He is Professor Emeritus of
Psychology and Public Affairs at Princeton. He is, for some, the person who
really defined the field of behavioral economics, and he is the author of one
of my favorite all-time books, Thinking, Fast and Slow. It is a book that
when you read it you can see in that book almost every bad decision you
have ever made in your life. So enjoy the next hour with Daniel Kahneman.
Daniel, thank you so much for joining us here on the CEB Talent Angle.
Daniel
My pleasure.
Scott
It’s really fascinating, Steven Pinker had a quote about you in The Guardian,
“His central message could not be more important, namely, that human
reason left to its own devices is apt to engage in a number of fallacies and
systematic errors, so if we want to make better decisions in our personal
lives and as a society, we ought to be aware of these biases and seek
workarounds.” Do you agree with Steven Pinker’s characterization of your
work?
Daniel
Yes, I think that’s right. He may sound a little more optimistic than I feel
about people’s ability to work around their own biases, which I think is quite
difficult.
Scott
Yes, I was reading a quote from you that was in Wharton and it said, “You
look at large organizations that are supposed to be optimal, rational. And
the amount of folly in the way these places are run, the stupid procedures
that they have, the really, really poor thinking you see all around you, it’s
actually fairly troubling.” Where do organizations, in your opinion, really fall
down on the job as far as self-examination?
Daniel
Well, very few organizations keep track of their mistakes. So they don’t
accumulate a long-term record that would help them improve their
practices. Instead what happens is that when there is a crisis, or when
something goes really very badly, then they learn too much from their
mistakes, and they change everything.
There’s a lack of systematic thinking about how to improve. In general, what
you find is that the procedures that they follow have evolved over time but
they haven’t been designed. That is, nobody has sat down to think how
could we do whatever we’re trying to do here, how could we do that more
efficiently? To give you an example, how meetings are conducted within
organizations. When people spend a lot of time in meetings, and usually I
think the meetings are very inefficient.
Scott
What’s fascinating to me is that you didn’t have an economics background,
yet you collided with economics back in the 1970s. You met a man and
started discovering the intersection of economics and psychology, his name
was Amos Tversky. Can you describe how you started working through
some of your theories?
Daniel
Well, we were really not trying to do economics, we were doing psychology.
And in psychology, we were looking at specific ways in which people depart
from the logic of rationality. The logic of rationality is really very extreme
and completely impractical for a finite mind. There isn’t much debate about
whether people can be rational, as rationality is defined in economics and in
the third theory, it’s impossible.
What we did is we tried to describe how the mind actually works and how
that causes predictable departures from the rational-agent model. Now, we
were not doing economics. What happened is that some economists, mainly
Dick Thaler, but not he alone, were impressed by what we did and they took
it into economics.
Scott
So they were looking at your theories thinking about decision-making, how it
applied to economics, and thus you became a Nobel Prize winner in
economics, fascinating journey. Now talk about decision-making. The
prospect theory might not be known to some people. Can you explain the
prospect theory as opposed to the rational-agent theory?
Daniel
Well, I suppose I can, but prospect theory is fairly complicated, so giving a
two-minute summary of it is not going to be perfect. I think one very
important point of the rational-agent model is that when the decision-maker
looks at consequences, at outcomes of decision, they look at the totality.
They take a very broad view of what the outcomes are.
So if you’re facing a gamble, in terms of the standard theory of decisionmaking, the rational theory, you should be asking yourself, how wealthy will
I be if I lose? How wealthy will I be if I gain, if I win? It turns out that that’s
absolutely not the way that people think.
People don’t think about their wealth mostly, except when they’re dealing
with retirement or with the possibility of ruin, but people think in terms of
gains and losses. Now it looks very simple, but it’s a big departure from the
rational-agent model because if you think in terms of gains and losses, you
are going to make inconsistent decisions. You’re going to violate the rational
model predictably and in big ways. So that is one important aspect of it.
We introduced some new concepts that did not have a place in the rationalagent model. I’ll give you an example, in the rational-agent model, the
difference between having $1 million and having $1,100,000 is really the
same as the difference between having $1,100,000 and having $1 million,
but there’s only a difference inside.
Psychologically, this isn’t true because if you start with having $1 million and
you go to $1.1 million, that’s a gain. But, if you start from $1.1 million and
you go down to $1 million, that’s a loss and gains and losses are not
evaluated in the same way. So that’s a fundamental assumption of the
rational-agent model of utility theory, as it is applied to economics, and the
way that people think, that’s a very big one.
Losses will be larger than gains. We call that loss aversion, maybe the most
important thing that we discovered or reported incorporated in our theory.
Loss aversion is not compatible with the standard rational-agent model. The
rational-agent model does not have gains and losses, it only has final states.
In two minutes, that’s the difference.
Scott
Well that’s a good two minutes and it leads us to really the conversation
that underpins the book, Thinking, Fast and Slow, which is, you identified
two types of decision-making and systems for decision-making. One,
System 1: Fast, automatic, frequent, emotional, subconscious. One, System
2: Slow effortful, infrequent, logical, calculating. Can you explain where
intuition leads us awry and how that relates to what you just talked about
with the prospect theory?
Daniel
What I call System 1 thinking, it’s not my term but it’s a term that I
developed in that model, that basically is the kind of thinking that happens.
It’s not something that you generate, but it occurs to you, it happens to
you.
Emotions belong to System 1. And whatever you see in front of you, you
don’t decide to see it, it just happens to you that you see it. So this is
System 1 thinking, it’s passive, things happen, things occur to you.
Intuition has that character. What people call intuition is having the feeling
that you know something without really knowing why you know it. That’s
the standard definition of intuition.
Now, most intuitions that we have are accurate and just wonderful, no
problem with them. In a sense, intuition is involved when you feel that it’s
safe to cross the street or when you drive. Intuition is involved when a
master player of chess decides to play.
But, in driving, that’s something that every one of us can do, but you can do
it without thinking. You brake, you make turns, you can do a lot of things in
driving while carrying out a conversation. So all of that, the highly-skilled
behaviors, are System 1.
It’s also the case that there are characteristics of how the mind works that
operate or characterize System 1 and they lead to predictable biases. I can
give you an example of a general one that’s quite important. System 1, and
the mind altogether is a sense-making organ, it seems to have evolved to
make sense of complex situations. It starts making sense of things right
away, without waiting for information, we update as we go. We create the
best story possible of information available.
Updating as you go actually means something quite specific. It means that
you are going to create the most coherent story possible as you go. You
interpret the new evidence to fit what you already think.
So many of the mistakes are going to have that character, that they
produce a coherent story. That story happens to you, you don’t generate it
actively. That’s the interpretation of the world that you get from System 1.
System 2 quite often just rubberstamps System 1. So we think, it occurs to
us, and that’s what we do. I can give you an example that many people will
recognize, it’s a puzzle. The puzzle goes like that: a bat and a ball together
cost $1.10. The bat costs $1 more than the ball. How much does the ball
cost?
Now the interesting thing about this particular puzzle is that, there is a
number that comes to everybody’s mind, really, essentially everybody, and
it’s $0.10. The problem is designed to create that association. So that
number comes to mind.
It’s false, and it’s very easy to find that it’s false because if the ball is $0.10,
then the bat is a $1.10, and the sum is $1.20, but I told you that the sum is
$1.10. So the correct answer is actually $0.05. But what’s interesting about
this problem is that 50% of Harvard students get it wrong, and MIT students
were not much better.
So, what happens? Well System 1 comes up with something, and System 2
just accepts what System 1 suggested. So when anybody, a college student
or anyone else, records $0.10 as the answer to that puzzle, you know one
very important thing about them, they didn’t check the answer. Because if
they had checked, they would know that it’s wrong.
So what this illustrates is how much in life we go on trusting System 1,
trusting whatever comes to our mind. That’s one of the ways in which the
mind works. That’s one of the ways in which biases occur.
Scott
Danny, I have to tell you with this problem, because I had read this
obviously previously. For background, I used to work in commodities, I was
a portfolio analyst for a commodities firm back in the day, so not really low
on the analytic horsepower. But after I read the problem and I determined
it was $0.10, I couldn’t get my mind to go back to $1.05 and $0.05, even
after reading it. Does that make sense from a bias perspective?
Daniel
Well, it’s very powerful—there are many of those things. We call them—
this one, many people do overcome, but there are many things, we call
them cognitive illusions. An illusion is something that you see something
wrong, a visual illusion. You know that you see it wrong, but you can’t help
yourself. Many cognitive biases have that character. They are illusions.
They are hard to resist.
Scott
We see it in companies all the time and we can lay out facts for them, and
they’re still going to go in the other direction because they already had
formed that, I guess, mental model of it, right?
Daniel
Yes, yes. Really our ability to ignore evidence that is incompatible with our
current beliefs is really remarkable. Another thing that is very characteristic
of the way the mind works and makes things extremely difficult, is that
people believe, what they think is, they think whatever they think for a
reason.
So people think that they’re Democrats because they can give you reasons
why they’re Democrats, and Republicans can give you reasons why they’re
Republicans. But in fact, they’re all wrong. You’re not a Democrat because
the reasons, you’re Democrat because you grew to be a Democrat when
you were socialized. Things happened to you, the sort of company you
keep. You’re a Republican for very much the same reasons.
We generate stories that explain our belief and then we have the
impression that our beliefs are explained by those reasons, but that is an
illusion. Our beliefs or attitudes, when we generate reasons for them, the
reasons are typically not the real cause for the beliefs that we have.
Scott
There is a fascinating study, I think it was Kevin Dunbar at Stanford who was
studying how decisions are made. What he determined in his research is
that we actually have somewhat of a mental delete button, where if
something doesn’t fit the narrative that we’ve already constructed, our
mind is preprogrammed to get rid of that new thought as it comes in. Did
you arrive at something similar in your work on biases?
Daniel
Oh yes, this is not a major innovation. Psychologists have known that in
one way or another for a long time. But information that comes in tends to
be bent towards your expectations.
One example that I give from my days as a professor is you give an exam
that consists of a series of essays. Now you read the first essay, you read
the booklet. And you read the first essay and it’s very strong. Then when
you read the second essay, you give the student the benefit of the doubt.
So whenever there is something ambiguous, you think he must have had
the correct idea. He didn’t express it very clearly, but usually he says
something completely foolish.
You tell yourself, this must be a typo, somebody who wrote the first essay
couldn’t be doing this. As a result, an interesting thing happens. When
somebody wrote two essays, one strong one weak, the overall grade of that
person will depend on which essay they got first.
If they got the strong essay first, their overall grade will be much higher
than if they got the weak essay first. That’s an example of how we bend
evidence to fit the preexisting story. The grade we give to the second essay
is not really determined only by the quality of the second essay. It’s very
largely determined by the quality of the first essay.
Scott
Is that an example, and I know that—I think it was Nassim Taleb who had
mentioned that you had taught him that you can change people’s anchors,
is that an example of anchoring by the first essay creates an anchor?
Daniel
I mean, that’s interesting. Not exactly, but it’s very much a closely related
phenomenon. The phenomenon of anchoring is slightly different.
What it is, is when you suppose in negotiations, you have two keep
negotiating, and one of them puts down a number on the table as a bid or
something. You know that it must be biased. You know that he’s claiming
some money that is really higher than it should be.
But an interesting thing that the mind does automatically, he said five
million, and automatically your brain is working to make sense of why he
would say five million. Because this is the way we help we understand
things, we understand things when making sense of them.
As a result, you tend to be—this is going to move you toward the five
million. So contrary to general impressions about that, going first in
negotiations, effectively in many situations, is an advantage because you
are likely to anchor the other side to whatever number you mentioned.
You have to resist anchoring if you go second.
Scott
Does that align with the halo effect as well where you try to mitigate the
halo effect?
Daniel
The halo effect is very much like the story of the two essays, that’s the halo
effect. Anchoring, it’s related, but those are technicalities. In anchoring, as
well as all the other [indiscernible] has to do with trying to tell a coherent
story, and there are many biases.
When actually trying to and making this sound deliberate, but it’s your
subconscious mind that it is trying to. You don’t know that you’re doing it,
but it’s something that happens to you. The way that we construct our
interpretation of the world tends to make it coherent.
Scott
And I think this goes back, as I look through your history, you seem to really
value outside perspectives. I think it was Michael Lewis, actually, who
detailed that you, at one point, tried to pay people to shoot holes in your
theories around the book, Thinking, Fast and Slow. Have you always looked
to poke holes in your theories on a consistent basis?
Daniel
Oh, yes. I’m extremely self-critical and my theories were still only usually,
or one of [indiscernible]. Again, that was something that was characteristic
of the work that Amos and I did together. We had infinite patience and he
had a phrase that he liked, which was, “Let’s get it right.” By that he meant
that this is the only thing that matters. Let’s work at it until we get it right,
and I’ve lived that way actually fairly consistently.
Scott
Daniel, I was just reading about how hard it is to go back and change the
System 1 and System 2 thinking. You mentioned work by Dan Gilbert and
how he viewed System 1 and System 2 thinking. Can you share with us that
perspective and how that aligns with your thinking?
Daniel
Dan Gilbert, many years ago, had a lovely paper in which he pointed out the
difficulty of not believing something. His point was that the natural thing
when we hear a statement, and I think he had something like, “White fish
eats candy” makes no sense, but you try to make sense of it. Maybe in your
mind there are fish and there is candy and you are trying to work it out. So
you’re trying to make sense of anything. Only after you have tried to
believe, can you un-believe.
The basic mindset is to accept things, to believe in them. In order to
address those ideas, you’ve got to work. That links very nicely with System
1 and System 2.
Scott
Yet it also leads us to the availability bias. The more readily something
comes to mind, the more likely you are to have a bias towards that. Does
that rank high on your list of biases that get in the way of decision-making?
Daniel
Oh, yes. Sure, what the availability bias links to is that anything that comes
to mind easily has an advantage in our thinking and is likely to influence us.
This really is a characteristic of the way the mind works. The mind works
associatively.
The main association that comes to mind that dominates your thinking and
your decision-making. The availability bias is just an instance of that, that
things that comes easily to mind, look plausible, they make sense, and you
think they’re likely to occur again.
Scott
The availability bias really strikes me as something that pervades most of
our lives. It comes to mind, we see it clearly, and then, like the example of
the bat and the ball, once I saw $1.10, I couldn’t get my mind to move off
the availability bias. What are the other top biases? I know that you list a
lot of different biases, but which ones do you think are most destructive in
the way that we make decisions?
Daniel
There is a complicated one that has a huge influence on our lives, and this is
optimism. And it certainly has a very large influence in the economy
because entrepreneurs are biased to be optimistic. A lot of economic
activity, I think, is undertaken by people who don’t know the odds. They
are much too optimistic about the odds they face.
I call that the engine of capitalism. So that’s an important bias. It’s not
altogether a bad one because: it may be bad for the individual, but it’s good
for society.
Another one that I’m less sure is useful, is overconfidence. That is that
people tend to, it’s the same thing that we discussed earlier, because they
tend to create coherent stories, the confidence that we have in a belief is
really driven by the coherence of the story that we’ve managed to
construct.
If the story is simple and coherent, then we are highly confident it is true.
This is quite often misplaced. The confidence that people have in their
beliefs is rather poorly correlated with the accuracy of those beliefs. And
yet we tend to take confidence as a clue to accuracy. That is often wrong.
Scott
Do these biases work together? It seems to me that there is an evil trap
sort of showing itself in here. Where, the availability bias starts our
thinking, confirmation bias and overconfidence then roll into this, and
we’ve already had an anchor so there’s anchoring biases. Do you see the
intersections of all of these biases creating a sort of mental lobster trap?
Daniel
Not—I mean it can happen that way, but it doesn’t necessarily happen that
way. Biases are quite common, and if you’re drawn to following System 1,
then they’re likely to be more common. I wouldn’t say, necessarily, that
they always occur together or reinforce each other.
Scott
It seems to me that I see a lot of this, but then again that might be the
availability bias on my behalf. Let’s turn to System 2 thinking and how
System 2 thinking can work with System 1 thinking. With it being noted up
front that you’re somewhat of a pessimist about our ability to get away
from the biases, how can people think about putting in process to
overcome the systematic thinking error or bias error that happens in
System 1 thinking?
Daniel
I have argued that this is much easier to do for organizations than for
individuals because organizations make decisions relatively slowly and they
have procedures. They can put procedures in place that will tend to protect
them against errors and against biases. That is one of my preoccupations
these days is, what are the kinds of procedures that organizations can
adopt to protect them from biases?
An individual, in order to—thinking occurs very quickly and we couldn’t
really do everything with System 2. We couldn’t do everything with
reflection. Life is too short, we don’t have time to reflect about everything.
So the one way to control biases is to recognize situations where you’re
likely to make an error and that’s not easy. And once you’ve recognized it,
to slow yourself down and try to compute the answer in a different way.
That is really quite an unnatural procedure, and that’s why I’m not very
optimistic about it.
Scott
Yes, and so I like the organizational tack. Let’s go down that road for a
second. One of the things we work with our CFOs on, is bringing System 2
thinking to otherwise System 1-oriented people in the organization. It
could be a CEO who really gets excited about some of the new technology
or products or sales people who believe they see a great opportunity and
they don’t see the hurdles to get there.
We work with our CFOs on two different tracks, and I’d be interested in
your take. One is to create a process where we force them to think of more
of the data points that align with it than just the three that made sense to
them and became, sort of, so from the availability bias. Where we take—
and here are the three things that seem to make a narrative to you, but
here are the other seven. What is that narrative tell us? How do we
balance them?
Then the other thing that we do is we work with them to create pattern
recognition over time, through good reporting and balanced reporting that
tries to show risk and opportunity. If we report in a certain way, over time,
the hope is that we create good pattern recognition within the organization
and really good—a business intuition, if you will. Feel free to disagree and
tear apart some of our work.
Daniel
Well, no, I don’t want to tear it apart. I have a somewhat different list of
things or I would have a different agenda. The first point I think overlaps.
Clearly, the problem that individuals and organizations have is to shortcircuit the process of decision-making, to reach an intuition and to reach a
feeling that you have solved the problem, prematurely.
That comes, really, from the third focal here and from the ease with which
coherent stories are created in our minds. Now my suggestion to overcome
that is slightly different. It is that, if you have a decision problem, it’s useful
to break it up into different judgments.
For example, when you’re going to try to hire somebody, it’s useful to
decide ahead of time that you are going to look for four or five or six
different characteristics, the traits that you want that individual to have.
The same thing is applicable to decisions much more broadly. Breaking
down a problem into dimensions into separate, I call them assessments, is
very useful because then we encourage people to make each of these
assessments separately.
What’s very important in reaching accurate decision-making is making your
judgments independently of each other so that you will not have that effect
of the first thing that you heard biasing your interpretation of all the rest.
So you want to look separately at different dimensions of the problem, look
at them independently.
The key to good decisions, in my view, is to delay intuition. You don’t want
to prevent intuition. You want people to feel that they solved the problem,
but if you delay it by having them think of the elements of the problem
separately, you’re likely to get a better intuition.
So that’s the way I would recommend going. One of the implications of
that, is once you have specified the dimensions, then you should also think
of whether the factual evidence that is relevant to each of the dimensions.
Once you have done that, you will accomplish something like the first point
in your own program, which is to try to cover all the relevant evidence.
Scott
I love that, and one of our CFOs has a strategy that he calls: “embrace the
crazy” which, it actually has a funny origin in that it went back to his family,
when the family would want to do something and they would just be so
sure that was the thing to do, he would say, “That is wonderful. I love that
idea, and I would love to do it, but I want to make sure that this is the best
choice. So, let’s think about that and think about one more thing and see if
we can make this an even better choice and a better outcome for us.”
Then he would say when they came back, “I love it even more, but there is
one more thing to consider here and I want to make sure that we really
have a great experience.” He would do that until he hit all the relevant
dimensions. What he found in his family, a lot of times, they would decide
not to do the thing that they really wanted to do. So he created a process
in his organization that he called embrace the crazy underneath, but he
called it the innovation lab on the surface to everyone else, where he would
say, “That’s a wonderful idea and I love it. I just want to make it a great
idea, so let’s consider one more dimension.” So somewhat in line of your
idea of delay intuition, right?
Daniel
Yes. There is another procedure which is similar to what your CFO does and
it’s called a pre-mortem. It’s an invention of Gary Klein. The idea is that
once you’re approaching a plan, but that’s when the plan is about to be
adopted so it’s probably at a more advanced stage than the stage at which
your friend wants to embrace the crazy. So when you’re approaching a
decision in favor of a plan, you gather the people for one hour or half an
hour and you go through the following mental exercise. You tell them take
a piece of paper and now think of the following, suppose we have done
what we are planning to do and it’s now three years later and I can tell you
it was a disaster. Now write the history of that disaster.
It turns out that people come up with a lot of objections that they hadn’t
seen earlier. So it’s another way of seeing through the various difficulties of
the various angles of the problem. It’s called a pre-mortem.
Scott
Yes, I like that concept a lot. It forces you into a different state of belief
where you have to believe the outcome is bad and then start
deconstructing, really interesting. So for the organization you have hope,
but for the individual not so much hope. Why is that?
Daniel
Well, because it’s very difficult to recognize that you’re making a mistake.
You’re just too busy making the mistake to analyze and dissect it in real
time. Really, it’s on rare occasions that you pick yourself up as you’re about
to make a mistake.
Anchoring, by the way, is one such way. That is, you may recognize that
here is something, that somebody’s proposing an anchor and you don’t
want that anchor. When I taught negotiations, I would tell my students if
you get a completely reasonable proposal from the other side, make
accedes. Just say I don’t want to negotiate with that number anywhere
near the table and wipe it out of there because otherwise you will be
anchored and you want to resist anchoring.
That’s something that people can learn and they can recognize and they
can act upon it. But availability biases and other errors that people make
are much, much harder.
Scott
Let’s talk about negotiation. Any other negotiation tactics that can help us
reframe? Because what speaks to me is that the argument gets framed in a
certain way and then you get constrained by the frame.
Daniel
That’s true, framing is very important in negotiation, but I have something
else to tell about negotiations, so I will. Actually, this month, or in
September, Max Bazerman and I have an article in the Harvard Business
Review about negotiations.
We propose a technique in negotiations to make the other side be fair.
That seems to be a novel technique. It’s not really related to the things that
I have done in the past but I think it’s interesting so I’ll tell you in a minute
about it.
Do you know about final offer arbitration? It sometimes is called baseball
arbitration.
Scott
No, I don’t, I could make a guess but—
Daniel
Final offer arbitration is when you go to arbitration but each side makes a
proposal, and the arbiter doesn’t generate a number of his own. He
doesn’t generate a judgment. He picks one of the two offers on the table.
That has an effect; it tends to make people much more reasonable because
they’re afraid that if they’re not reasonable then the arbiter will select the
other guy. So that technique is known as an arbitration technique but we
have a twist on that.
We said that in the usual negotiations, if the other side looks completely
unreasonable and you think that you have a pretty reasonable offer on the
table, then you tell the other side, look, I am willing to go to final offer
arbitration with my proposal against yours and I do not intend to move
toward you. I’m not going to do that negotiation dance with you until you
come down to a reasonable position where you are willing to go to final
offer arbitration.
That tends to move the other side towards you very substantially because
you have given a reason why you refuse to go through the normal process
of exchanging concessions. You’re saying: “you are too unreasonable; I will
not exchange concessions with you until you become more reasonable.” So
we call that the final offer arbitration challenge and it’s on my mind these
days.
Scott
I like it. Something that’s interesting that came up in some other research,
it’s not in my notes here, but when you give a reason for anything that
you’re doing, there is, I don’t know what the probability bump of
acceptance is for your proposal, but it goes up when you give a reason.
They use the example of people standing in a line for a copier back in the
old days. If they ask if they can get in line, they would say no. But, if they
said, I need to get in line to make copies, the probability went up of them
getting into line.
Daniel
It’s a famous experiment. I would like to see it repeated because there are
many experiments that we now raise questions about, this is one of those
that I would like to confirm. But, it certainly is a relevant thing and I think
there is something to it.
Giving a reason is more compelling and what it does, giving a reason, it’s
not rude. That is, when you just tell people, would you let me go ahead
please, that is something that gets people’s back up. But when you’re
giving a reason, you’re playing a different script, and a script which is, if
they’re not thinking at all, they are mindless, which is the context in which
that experiment was done. If you’re mindless, then you may accept that
and let the person go ahead.
Scott
Daniel, as I looked across your history, it seems that you have always built
in some safeties around your thinking and that you were always partnering
and using sounding boards along the way. Is there a lesson for corporations
in there as well?
Daniel
No, I think I am quite sociable and I like working with other people, so I
have collaborated all my life, but there are contexts in organizations where
you want to do that. That is, there are many contexts in organizations
where it is better for teams to make decisions and take the responsibility
for them than for individuals, but that’s a very different thing than looking
for collaboration.
Scott
Can you detail some of those circumstances where a team decision is
better?
Daniel
Well yes, I’ll give you an example. In a firm that, say, makes risky
investments, somebody who will make that investment, they tend to be
more risk-averse than the firm wants them to be because if things go sour,
you lose your job.
The firm actually wants people to be risk-seeking. So in order to achieve
the right level of risk-taking, it’s much better to have the responsibility
shared by a team, so that if something goes wrong, the team takes the
responsibility and not the individual. There are many situations like that
where you basically want to protect the individual in order to allow the
individual to make decisions that are better for the organization.
Scott
I like that. I want to make sure that we give some proper due to your HBR
articles. So the article that’s going to be on negotiation that’s coming up,
do you have a title for that yet?
Daniel
The Final Arbitration Challenge, I forget what headline they give him on it,
but Max Bazerman is a featured author in that issue, which I think is hitting
the stores next week or so.
Scott
Then, you have another article that’s been, I guess, entitled Noise. It seems
like you touched on—
Daniel
Yes, the title of that is Noise, and it’s coming out a month later.
Scott
I think you touched on some of the concepts. Can you give us the overview
of Noise and why it’s important?
Daniel
Yes, you have noise in that there are many situations in which individuals
make decisions on behalf of the organization. And the organization actually
doesn’t check whether the people are doing that are interchangeable. So
do underwriters determine a premium for a case? Would different
underwriters do the same thing? Would different physicians in the ER do
the same thing when faced with the same patient?
Quite often you find huge variability. What is interesting about it, is that
typically the organization is completely unaware that it has that problem.
So I call noise an invisible problem where there is a lot of variability but
everybody’s quite happy with the decision that they are making, and
everybody trusts their colleagues and believes that their colleagues are
pretty smart, and if they’re pretty smart and I make good decisions, then
presumably they would agree with me. That’s an illusion, it turns out, in
many situations.
Scott
How do you conclude companies should overcome that?
Daniel
There are different ways of overcoming it. One, the most radical is actually
to eliminate human judgment and to use algorithms, to use rules. That’s
because an algorithm or formula has the characteristic that if you present it
twice with the same input, it will give the same output. This is not true for
people and it’s not true for different people in the same role in an
organization.
Algorithms have a huge advantage over people because of their
consistency. But in many situations algorithms wouldn’t be practical either
politically or objectively. When they’re not practical, then you must put in
place some way to discipline people’s thinking.
I was talking about that earlier. That typically means breaking up the
problem and looking at the various aspects of the problem in the same
order and linking evidence systematically to your conclusions. So they’re all
ways of imposing structure and discipline on the thinking of people, which
will both improve accuracy, quite often, and certainly reduce noise.
Scott
As you’re looking forward, too, to where you apply these, you have a
consulting firm as well. Can you talk about what kind of projects you work
on from a consulting basis?
Daniel
The work that’s coming out in HBR, comes out of the consulting work that I
did a couple of years ago.
Scott
Then the upcoming book with Michael Lewis.
Daniel
Michael Lewis is writing a book about my collaboration with Amos Tversky.
It’s going to be out in December. All I know are the questions that he asks
me, but I haven’t seen the book, and I’m not going to see it, I think, until it’s
in print.
Scott
So what do you think, as a closing thought here, that made that
collaboration so effective?
Daniel
We really enjoyed each other’s company. So we spent a huge amount of
time together, most of our working days. Because we were enjoying each
other’s company, we had infinite patience, and so we worked until we got it
right. Then in terms of skills, we understood each other very well. We
overlapped enough to understand each other but we were sufficiently
different to surprise each other. So we made a very good team.
Scott
If you had one message for executives who are listening right now about
how they should think about their roles differently, or what they should do
differently, what would that be?
Daniel
Well, it would be that you should look at your organization as a factory that
produces decisions. You should look at decision as the output of the
factory. Then ask, is my factory really well organized to produce the best
decisions possible? It’s an angle that I think people don’t take enough.
Every organization, every business, is a factory for making decisions. They
make multiple decisions at the same time. Yet we tend to be much more
rational and much better organized when we design factories than when
we design decision-making procedures.
Scott
So true. What about into the future, as you look at where we’re headed in
the next ten years, is there anything on the horizon that we should be
aware of that you’ve been able to discover in your work or see in the
greater macro view of the world?
Daniel
I don’t know, I don’t really believe in my ability to forecast anything, but the
things that are happening very clearly now is algorithms are coming in and
artificial intelligence is coming in. They’re coming in together and that is
going to cause massive changes. It’s not within the next 10 years probably,
but within the next 30, certainly.
Scott
Well, Daniel Kahneman, Nobel Prize winner, a professor at Princeton,
author of Thinking, Fast and Slow, thanks so much for joining us. If people
want to learn more about you, where can they go?
Daniel
Well, I don’t know, if they have to read about me or about the things I’ve
gone and thought about, the best way to get acquainted with my thinking is
to read, I would say the first part and the third part of Thinking, Fast and
Slow. The first part is about the two systems and the third part is about the
real world, about overconfidence and it’s about [indiscernible]. So those
two are the most important parts of the book for your audience, I think.
Scott
Danny, thank you so much for your time.
Well, thank you so much for joining us. If you enjoyed this episode, please
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