Bias and Noise: Daniel

Kahneman on Errors in
Decision-Making
J. Nathan Matias

Oct 18, 2017·9 min read

Right now, many people are concerned about systematic biases in

human decisions. If we care about improving human or algorithm
decisions, how can we think about the sources of errors?

Speaking at the Kahneman-Treisman Center for Behavioral

Science and Public Policy today is Daniel Kahneman, the Nobel
prize-winning psychologist, one of the center’s two namesakes. I
was lucky enough to get a ticket to this packed event and liveblog
Danny’s talk.

Center Director Eldar Shafir starts out by telling us about the

impact of the arrival of Anne Triesman and Danny Kahneman on
the Wilson School. Danny was the first psychologist at Princeton’s
policy school. Anne was the first psychologist to win the golden
brain award, and Danny was the first psychologist to receive the
Nobel Prize. Today is Danny’s first visit to the center since it was
founded. Next Eldar introduces Betsy Paluck, the deputy director
of the center.

Betsy talks about Danny’s research style, his dedication to

precision, his willingness to wait for the right answer, and his
commitment to talking out ideas, which are legendary. His
collaboration with Amos Teversky produced a series of articles
that shattered how we think about decision-making, a story that
was recently documented in The Undoing Project.

Understanding Error in Decision-Making

Danny starts out by talking about his experiences consulting, and
what he’s learned about the idea of error. Over the past few years,
he’s been consulting with many large organizations. “I’ve been
observing more folly than I expected,” he says. “People often say
that the private sector is better than government, and if
government is worse than what I’ve seen, then we’re really in
trouble.”

We have too much emphasis on bias and not

enough emphasis on random noise

Think of what comes to your mind when you say “measurement

error,” says Danny. Now think of what comes to your mind when
you think about “judgment error.” When we think about
measurement error, we think it’s random. The main association to
judgment error is bias. This is unfortunate, says Danny. We have
too much emphasis on bias and not enough emphasis on random
noise, says Danny. Noise is easier to measure and easier to control
than bias. To think about statistical bias, think about your
bathroom scale. Most scales are biased– very few bathroom scales
are unbiased. A scale that is not very expensive is likely to show
you different weights based on where you’re standing. If you stand
on the scale several times, you’ll get different weights– that’s
noise.

Comparing noise to bias

Noise, Danny tells us is like arrows that miss the mark

randomly, while bias misses the mark consistently. Bias
and noise are independent and shouldn’t be confused. Something
can be both noisy and biased. People frequently think that noise
cancels out, because the mean tends toward zero. This isn’t true;
the standard measures of error in statistics add up. Both bias and
noise are additive.

One important advantage of noise is that you can measure noise

without knowing where the target was. When you remove the
target, you have no idea if the measurement was accurate or not,
but you can still see whether there was noise.
Many people focus on noise between subjects and within subjects,
says Danny. In one study, Radiologists who see the same x-ray
gave different diagnoses to the same x-ray 20% of times. In one
study, wine tasters, who are supposed to be experts, will rarely
agree with themselves when rating the same wine twice. We also
have between-subject noise: auditors, product reviewers, and
supervisors tend to different quite a lot. Psychologists have known
about differences between people (noise) for a long time, but we
tend to think more about bias within people.

Improving on Human Decisions By Reducing

Noise
Next Danny tells us about a 1955 study by Paul Miehl, who
compared the accuracy of professional judgments to the accuracy
of very simple statistical models. Very simple rules tend to do
better than individuals, found Miehl. Nearly 250 studies have
looked at this issue. In 50% of them, the algorithm is clearly
better, and in 50% they’re tied. If it’s a tie, then the algorithm
wins.

Why are algorithms superior to people at decision-

making? This is because algorithms are noise free. If you give it
the same stimulus twice, you are going to get the same output.
Danny talks about the idea of creating a statistical model
predicting what professional appraisers will do. The model of
people will be more accurate at predicting the outcome than the
people themselves. There’s only one way this could happen: people
are very noisy, and the model, which is less noisy, can be more
accurate than they are.

If you ask a person to make multiple judgments,

they will give different answers, and if you average
their answers, the answer is more accurate

Danny emphasizes one point: where there is judgment there

is noise, and there’s usually more of it than you think. Where
does noise come from? Neurons, perception, internal judgment
and more. If you ask a person to make multiple judgments, they
will give different answers, and if you average their answers, the
answer is more accurate. Why is this so? People put attention
toward different things when making decisions at different
moments. Individuals also differ, sometimes in systematic ways,
he says. From an organization’s point of view, differences between
people is noise.

Imagine you have two underwriters in two offices assessing the

premium between two risks. If there’s noise, the assessment will
depend on which underwriter is on duty that morning. The noise
may come from individual bias, but from the point of view of the
organization, we have noise.
Measuring Noise in Organizational Decisions
How can we measure noise? Kahneman tells us about an
experiment conducted in an insurance company. In this study,
Danny looked at guesses by claims adjusters about how much to
reserve for an insurance claim. They also looked at underwriters,
sharing six realistic insurance cases to 50–60 people. They
calculated a statistic to estimate the noise. Underwriters were
given a half day to evaluate the cases. When Danny talked to
executives, he defined the statistic as follows: take two
underwriters, compute the average of their assessment, compute
the difference between their assessment, and then divided it by the
average. They then compared every pair of underwriters. What
would we expect the average to be across all pairs? Executives
expected the noise to be 10%. Instead, the experiment found 50%
variability. In practical terms, suppose you have two underwriters
and one says the premium will be 700 units and the other says
1250, that’s a 50% different. That’s the average amount of noise; in
50% of cases, there is more noise than that between pairs of
individuals.

This level of noise is shocking to executives; that level of noise is

intolerable. If underwriters are that noisy, it undermines the point
of the exercise. The most disappointing result was that experience
did not matter. Comparing people with more than 5 years of
experience on the job to novices, the experienced people had just
as much noise.
Why Organizations Fail to Notice Errors From
Noise
Noise is an invisible problem: nobody had guessed that it could
occur. How could an organization not know that it has a noise
problem? Imagine you’re an underwriter and you see a case. You
have a good idea of what the premium ought to be. You respect
your colleagues, so you expect them to make the same judgment
you do. You don’t imagine that your neighbor, the person at the
next table, could give a completely different judgment. People
occasionally discover disagreements, but that always occurs as an
isolated case. In general, we don’t tend to think about plausible
alternatives to the judgments we make. We live in different
realities, but we don’t realize how different those realities are.

When you have a judgment and it is the noisy judgment, your

judgment is determined largely by chance factors. You don’t know
what these factors are. You think you’re judging based on
substance, but in fact, that’s just not the case.

Preventing Errors from Noise in

Decisionmaking
What can we do about noise? This is fairly easy to answer, says
Kahneman. You should try to avoid working with people and have
an algorithm that is noise free. Creating an algorithm that will do
better than judgers is a very simple exercise, he says, citing Paul
Meehl. Even when you you create a multiple regression model and
use it to make judgments, there is hardly any difference between a
regression model and a simple weighted formula that gives +1s
and -1s to things you think are good and bad, says Danny.

In many situations you can’t use an algorithm, either due to

objective or organizational reasons. Employees hate to be replaced
by algorithms; it’s extremely difficult. What can you do instead?
There is a room for human judgment in algorithms as an input to
the algorithm. What you don’t want is to have people make the
final decision if you can afford it, but people can provide very
useful input to algorithms. When algorithms are impossible, you
can simulate them, Danny says.

Consider, for example, the problem of selecting personnel, says

Danny. We have reached the point where we cannot improve the
process further than is currently done. First, don’t try to form a
general impression of the candidate; break it up into different
areas, and evaluate each feature independently of the others.
Nearly 60 years ago, Danny was tasked with setting up an
interview system for the Israeli army. He defined six traits,
interviewers rated people on those traits, and he averaged the
results. People rebelled, saying he was turning them into robots.
So Danny made a big concession. He told them: do it my way first,
assessing each area one at a time. When you’ve completed the job,
close your eyes, and make a judgment, asking “how good a soldier
will they be?” He intended this to please & placate them. That
followup intuitive judgment processed after assessing the
components independently is quite valid, says Danny. These
structured interviews are better than unstructured interviews, he
tells us.

We can do something about noise, says Danny. By structuring the

judgment task, we can improve the quality of the judgment by
directing people to the same facts in the same way. Other, more
expensive approaches involve using multiple raters.

The Bias Bias: Why We Emphasize Bias Over

Noise
While noise is the big problem, we tend to have a bias bias. In the
last fifty years, he says, there has been an explosion of study of
cognitive biases. There have been thousands of articles and dozens
of books on the topic. Why might this be? Cognitive biases are a
byproduct of how intuitive thinking works. These errors are not
motivated errors. If you trace how intuitive thinking works, you
are bound to find biases. People sometimes accuse Kahneman of
arguing that people are irrational; this isn’t true, he says. Errors
are rare, he says. They’re theoretically important for
understanding human decision-making, and they add up in large
organizations, but you shouldn’t think that people are making
errors all the time.
While psychologists sometimes see biases that are motivated,
economists think of errors as random. It was useful to economic
theories to allow that agents sometimes make mistakes without
questioning the basic rational agent model. Richard Thaler wrote a
book called Misbehaving, his intellectual autobiography.
According to Thaler, the idea that people make predictable errors
changed his life; he spent 30 years writing a spree of papers that
led to the Nobel Prize. While we can know things about
predictable errors, we have found very few ways to systematically-
reduce those errors.

It’s false to hope that if you become more aware of your errors you
will make better decisions, says Danny. There has been no
breakthrough on efforts to reduce bias. Furthermore, all the work
on biases has distracted from noise, which we know we can
reduce. Kahneman’s recent research on noise has caused him to
question the work he’s done over the years and consider the value
of focusing instead on noise.
J. Nathan Matias

Citizen social science to improve digital life & hold tech accountable. Assistant Prof,
Cornell. citizensandtech.org Prev: Princeton, MIT. Guatemalan-American
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