HBR IdeaCast Why Smart People (Sometimes) Make Bad Decisions
May 25, 2021
Daniel Kahneman, a Nobel laureate and emeritus professor at Princeton, teams up with Olivier Sibony, a strategy professor at HEC Paris, to explore the intriguing concept of 'noise' in decision-making. They explain how noise, distinct from bias, leads to inconsistent judgments even from the same individuals under similar circumstances. The duo shares strategies for combating noise, emphasizing the importance of structured decision-making processes and independent evaluations to improve organizational outcomes. Dive into their insights for enhancing decision integrity!
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Sources of Noise
- Noise has three sources: variations in average levels (toughness), tastes (ranking of crimes), and within-person variability.
- Different judgment personalities are the biggest source of noise.
Corporate Consequences of Noise
- Inconsistent pricing in insurance can lead to lost customers (high prices) and undercharged risks (low prices).
- Noise in employee ratings undermines credibility and fairness, even if the average is accurate.
Conduct a Noise Audit
- Conduct a noise audit: have multiple people make judgments on the same cases to measure variability.
- Compare observed variability with expected variability to identify if you have a significant noise problem.
