Books

Why people make mistakes

TCA Srinivasa Raghavan | Updated on June 14, 2021

Title: Noise: A Flaw in Human Judgement Authors: Daniel Kahneman, Olivier Sibony, Cass R Sunstein Publisher: William Collins Price: ₹699

This book dissects the process of ‘judgment’ and why it goes wrong more often than not

Why did Prime Minister Narendra Modi and his government go so dreadfully wrong in judging the onset and severity of the second wave of the coronavirus? This book provides us with a way of understanding what probably happened to their judgment.

It is written by three of the world’s best economists. Daniel Kahneman won the Nobel prize in economics in 2002 and is one of the parents of behavioural economics, along with the late Amos Tversky.

Olivier Sibony is a professor of strategy at the HEC in Paris, which is Europe’s answer to the Harvard Business School. And Cass Sunstein is a professor of economics at Harvard and best known for his book Nudge with Richard Thaler, another economics Nobel winner.

The thesis

This book analyses an important question: Why do people make mistakes? As might be expected from the assembled talent, it is absolutely brilliant. It holds your attention as few such books do because they write well, too. There’s no turgid prose at all. Everyone should read it.

In the end, say the authors, judgment can go wrong more often than we think. They explain why this happens by making a distinction between a well-known phenomenon, bias, and a new concept they introduce, ‘noise’.

With bias you can predict what will happen; with noise you can’t.

Bias therefore has a pattern which noise doesn’t. And, as they show so convincingly, noise is more pervasive and ubiquitous than we realise. Indeed, it is critical to judgment.

Noise, they say, is when “people who are expected to agree end up at very different points around the target.” Everyone agreed that corona was a huge threat but when it came to using judgment they came up with different conclusions.

The authors say we see this all too often in group decision-making where everyone wants the same thing but ends up making very different suggestions as to how to get it. Result: bad outcomes.

They give many examples such as doctors diagnosing a patient or judges trying a case. Nearly always, they arrive at different conclusions.

The structure

The book has six parts. Part One is about the difference in bias and noise.

Part Two is about the nature of human judgment and the measurement of accuracy/error in it.

Part Three, which bureaucrats will love, is about how rules reduce or eliminate noise.

Part Four explains why noise happens.

Part Five tries to find ways of improving accuracy in human judgment.

Part Six discusses the merits of rules vs standards in decision-making.

When you have read through the descriptions and the analyses, you realise how and why things go wrong so often.

It seems it’s just the way we humans are.

How to read it

Books with complex ideas are often not easy to read. The old way of “starting at the beginning and going to the end omitting no detail however slight” doesn’t often work.

My recommendation is that you start with Part One, skip to Part 4, and go to Part 6, before reading the other three parts in no particular order.

Part Six, which is about rules vs standards is, to my mind at least, the one that all managers, in government or the private sector, must understand fully.

Arguably, the subject matter has been discussed before, over the centuries. But this book brings an altogether new perspective on it.

Rules vs standards

The authors ask how decisions should be made so that noise, which involves large dollops of judgment, can be eliminated or minimised. The answer is in the following quote:

“Rules are meant to eliminate discretion by those who apply them; standards are meant to grant such discretion.” This is not very different from the debate over rules and principles that the RBI was being asked to follow to govern financial markets.

Eventually, it was rules that won the day, much to the relief of the RBI, which was under enormous pressure to opt for principles-based regulation. Even the British who had invented the distinction, gave it up.

Dignity

The authors have devoted a full chapter to human ‘Dignity’. Indian bureaucrats must be made to read it at the pain of death. It deals with one of most intractable problems of governance. It asks how to treat people: as a ‘faceless mass’ or as individuals who have a sense of dignity.

There is a wonderful discussion of the issues involved and they conclude that if a society prefers the case-by-case approach, it must also be prepared for the inequity that is inherent in it.

Basically, how rigid do you want the system to be if such rigidity dents your dignity but, at the same time, not being rigid dents social welfare?

For example, the current 84-day rule for the second shot of the Covid vaccine is most certainly very arbitrary. But how rigidly should it be applied?

If the rule is overlooked, there is a private benefit to someone. But this benefit entails a social cost in that someone who has not had even one shot may have to wait longer — and may even end up infecting others. That risk is non-trivial.

Conclusion

Kahneman, in an interview, said: “Simple rules tend to be very good; people who are not governed by rules tend to be extremely noisy in their judgements. When you become conscious of the problem of noise, you become conscious of the value of rules and of discipline.”

One can think of Indian governance as perhaps the most ‘noisy’ in the world. In conclusion, I can’t resist the temptation of drawing the authors’ attention to the Indian bureaucracy.

It applies rules by using discretion, that is, the old saying, “show me the man and I will show you the rule.” No wonder we make such a mess of things.

Published on June 13, 2021

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