Silencing the ‘Noise’ Behind Bad Corporate Decisionmaking | Stephanomics

Much of the appeal of McDonald’s comes from the chain’s consistency. A cheeseburger in the US or a McSpicy Chicken in India should taste the same every time. But what if a business had wildly different outcomes depending on which leader was making decisions? Renowned psychologist Daniel Kahneman calls this variability “noise,” and suggests controlling it is key to ensuring the best decisions get made.

In this week’s episode, Stephanie interviews Kahneman, a best-selling author and professor emeritus at Princeton University, and Olivier Sibony, a professor of strategy at HEC Paris, about their new book, “Noise: A Flaw in Human Judgment.” (Their co-author is US legal scholar Cass Sunstein of Harvard Law School.) Kahneman and Sibony argue businesses often wrongly assume their decisionmakers will make similar judgments given similar circumstances. Kahneman relates an experiment he conducted with an insurance firm and dozens of its underwriters. It’s fair to predict underwriters would reach similar conclusions about a case’s risk and put a similar dollar value on it, right? Wrong. Kahneman found judgments often varied by 50%, or five times the divergence one would reasonably expect.

Silencing that noise often means adopting good decision “hygiene,” the authors said. Many job interviews start with employers having an initial impression and spending the rest of the interview justifying it. Instead, companies should use structured interviews with standard questions that might help disprove false impressions, Kahneman said. And while many firms use artificial intelligence to weed out job candidates, they’re likely doing themselves a disservice, Sibony said. Too often, the algorithms themselves are faulty, he said. “My worry is that companies are using this mostly to save time and money, not to actually improve the quality of their decisions,” Sibony said.

Will Covid-19 reshape the global economy or simply shrink it? What are nations doing to protect jobs and businesses from the fallout, and what will the long-term consequences be for labor markets, global supply chains and government finances? On Stephanomics, a podcast hosted by Bloomberg Economics head Stephanie Flanders—the former BBC economics editor and chief market strategist for Europe at JPMorgan Asset Management—we combine reports from Bloomberg journalists around the world and conversations with internationally respected experts on these and other issues to bring the global economy to life.

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