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Tuesday, September 21, 2021

Strategic CSR - Bias vs. Noise

I noticed the article in the url below because of the authors (two of whom are well-known behavioral economists), but I liked the article because of its distinction between bias and noise:

"A bias is any predictable error that inclines your judgment in a particular direction. For instance, we speak of bias when forecasts of sales are consistently optimistic or investment decisions overly cautious."

In contrast:

"Society has devoted a lot of attention to the problem of bias — and rightly so. But when it comes to mistaken judgments and unfortunate decisions, there is another type of error that attracts far less attention: noise."

Both bias and noise are problems, according to the authors, but they are different problems:

"To see the difference between bias and noise, consider your bathroom scale. If on average the readings it gives are too high (or too low), the scale is biased. If it shows different readings when you step on it several times in quick succession, the scale is noisy. … While bias is the average of errors, noise is their variability."

The authors draw on research data to emphasize the scale of the problems that noise creates:

"In a 1981 study, for example, 208 federal judges were asked to determine the appropriate sentences for the same 16 cases. The cases were described by the characteristics of the offense (robbery or fraud, violent or not) and of the defendant (young or old, repeat or first-time offender, accomplice or principal). … The average difference between the sentences that two randomly chosen judges gave for the same crime was more than 3.5 years. Considering that the mean sentence was seven years, that was a disconcerting amount of noise."

They use other, equally stark examples to demonstrate their central point that "wherever there is judgment, there is noise – and more of it than you think." They also apply the lessons of research to business, emphasizing the potential blind spots if noise is ignored:

"A company's hiring decisions could be unbiased overall if some of its recruiters favor men and others favor women. However, its hiring decisions would be noisy, and the company would make many bad choices. Likewise, if one insurance policy is overpriced and another is underpriced by the same amount, the company is making two mistakes, even though there is no overall bias."

Ultimately, they contribute to a highly salient debate that is currently roiling organizations – the degree to which employees are valued for their individuality and encouraged by companies to bring their 'whole selves' to the workplace:

"We celebrate the uniqueness of individuals, but we tend to forget that, when we expect consistency, uniqueness becomes a liability."

Take care
David

David Chandler
© Sage Publications, 2020

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Bias is a Big Problem. But so is 'Noise'
By Daniel Kahneman, Olivier Sibony, and Cass R. Sunstein
May 17, 2021
The New York Times
Late Edition – Final
A19