Subba’s Serendipitous moments

February 25, 2009

It’s the perception, stupid!

Most decision making processes pay a disproportionate emphasis on the aspect of analysis after one has made an assessment of the situation.

In fact the more important the decision, the more sophisticated the analytical tools.

That by itself is not wrong. However what is wrong is that spectacular errors in decision making can occur not because the analytical tools are inadequate, but our perception tools are! In fact, I blogged about decision frames borne out of perception here

The recent crisis amply  illustrates why:

  1. Even the highly respected Alan Greenspan admitted that he made a mistake by assuming that self-interest would enable banks to protect their own share holders.
  2. Few people are even aware of the perception biases. Looking at and perceiving the world is an active iterative process of creating meaning. This process is dynamic and often it shapes the subsequent steps in the decision making chain including the choice of analytical tools.
  3. Like perception bias, we also suffer from some form of selection bias. There’s a strong predisposition to see data that confirm our biases and ignore data that contradicts them. We also seem to emphasize recent events than historical events when anticipating the future outcomes.
  4. We also seek refuge in the majority. Just because a majority hold a particular view is no proxy that they have to be right. Often a majority is caused by a social contagion and they tend to avoid facing the “Black Swan” moment. And as the crisis has shown, the majority need not be correct.
  5. We need to understand human motivation for sure. Rewards and penalties are one axis to monitor human behavior, but there’s another equally important axis that has been given less importance. The better we understand how fear and greed are represented at an individual level and how they respond to specific externalities, we would be able to avoid crisis. It more important for Type A personalities than Type B personalities.

So are there any ways to improve perception tools?

  1. First, there has to be humble admission that we have limitations and flaws in the way we think about a given situation.
  2. There has to be a more open and backwardly integrated communication of how we arrived at a particular assessment or how we ‘manufactured’ meaning as we saw the situation. Such a communication helps us to uncover the biases.
  3. Every feedback mechanism should be “de-politicized” so as to uncover inconvenient facts.
  4. I am actively looking for more perception tools, since I have long been convinced that better perception is superior to better analysis.

One of the approaches that I have adopted to improving my own perspective is to “sleep on it” for a while.

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