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Cultivating judgement

One of the big challenges we face, both in the financial world and in everyday life, is how to overcome our biases. That is how to resist our inclination to tackle problems in a one-sided way.

To be clear the topic here is not that of prejudices; such as hostility to Australians or enmity towards ginger-haired people. It is instead about what seem to be deep-rooted flaws in human reasoning. For instance, we tend to give too much weight to our personal experience relative that of the broader population. If we know someone who is suffering from a particular disease we will typically over-estimate its prevalence in society as a whole. 

Another example is our preference for the status quo. We generally prefer things to stay broadly as they are, rather than to opt for radical change, even if there is scope for considerable improvement.

Yet it is wrong to see such biases as evidence of irrationality. As Madan Pillutla, professor of organisational behaviour at London Business School, explains in an interview in this month’s issue (see p16) there are reasons why such biases have evolved. Humans typically use rules of thumb or ‘heuristics’ when they make decisions. These work in the vast majority of cases, when fast decisions are important, but they have limitations when considered thought is necessary. 

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In everyday life it is reasonable to assume that personal experience provides a basis for action. But when making decisions about investment matters such a premise could well lead in the wrong direction.

Pillutla suggests that we learn de-biasing strategies to help overcome our one-sided inclinations. For example, even those with high level professional training, such as medical doctors, are notoriously error prone when it comes to questions involving probability. But when problems are posed in a more concrete way – such as saying something happens three times out of a thousand rather than that the incidence of a particular occurrence is 0.3% – their performance improves considerably. That is despite the two statements being numerically equivalent.

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However, it would be a mistake to assume such questions of enhancing judgement are new. On the contrary, the Greeks placed a heavy emphasis on practical wisdom or what they called phronesis. To cultivate judgement they discussed the implications of unlikely tales such as that of a protagonist who murdered his father and married his mother. 

No doubt our understanding of the workings of the mind has increased considerably over the past 1,400 years. But many of the intellectual challenges are broadly the same.

Cultivating human judgement is a key task if we are to make balanced decisions in all areas of life. 

Daniel Ben-Ami, Deputy Editor
daniel.ben-ami@ipe.com

Readers' comments (1)

  • Thank you for this editorial, raising attention to an issue that impacts both our work in the pensions industry and life in general. The first step to fight biases is to be aware of them, and your article is a welcome contribution in this direction. Well done!

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