Every once in a while, a book gets published that has the potential to be a game-changer in a particular field of study. Noise, A Flaw in Human Judgment is just one of those books. It’s written by Daniel Kahneman, Olivier Sibony, and Cass R. Sunstein -- three brilliant and well-known authors in the field of decision making and behavioral economics. And anyone who has a desire to understand how behavior clouds our judgment will want to immerse themselves into the ground-breaking discussions in each chapter.
So why all the hype? One can argue that up to this point, behavioral economics has been a discipline that primarily concentrated, analyzed and dissected numerous biases that short-circuit our financial decision-making process. It has also been the focus of the FinWizdom podcast series--helping you recognize these behavioral risks and how they impact your ability to manage your money. However, as we are to discover from this book, biases are only half of the story when it comes to our emotions influencing our judgment. What is an equal contributor to errors in our decision-making is NOISE.
The difference between biases and noise are significant. Biases are various behavioral influencers that systematically take us off-target in our attempts at rational decision-making. This is when we unevenly weigh in favor or against an idea, concept, strategy, purchase, person--basically a tendency or prejudice relating to something or someone. Biases are present when we can trace errors in a set of judgments that flow in the same direction. Think of it as the average of errors among a set of decision-makers.
Noise, however, produces more of an independent decision-making pattern in our judgment that reflects no obvious bias. And noise has its own list of variability, labels and sub-sets, which I will leave to the book to define. Similar to biases, there are numerous causes that drive noise--namely overconfidence, mood, the perceived wisdom of others, recent experiences, informational cascades, social pressures, group polarization and more. In order to overcome these causal drivers, the authors walk us through several noise-cancelling processes using strategies aptly named actively open-minded, decision hygiene strategies, accuracy in judgment, thinking statistically, resisting premature intuitions, independent judgments, debiasing, favor relative vs. absolute judgments and scales, and so on.
One of the reasons this book resonates with me and FinWizdom's mission is in terms of noise-reducing strategies associated with debiasing. It's what the author's refer to as boosting, which is educating others to recognize these behaviors in an attempt to accommodate, overcome and potentially make less errors (with your money). It's no easy task, but I believe that through active listening skills associated with podcasts and by providing entertaining and relatable storytelling, FinWizdom can help you increase the retention of what you learn.
On top of the assorted causes and methodologies you'll learn throughout the pages, the book also dovetails into specific areas of concentration and where noise may be prevalent. Woven into the chapters are discussions about the presence of noise associated with our criminal justice system, strategic decisions in large corporations, human resources challenges, influences in the fields of forensic science and medicine and, of course, financial decision-making.
And while noise can potentially be a more important problem, it is rarely recognized as one. That’s because of its subjective nature and many of its solutions reduce one’s sense of individual values based on experience and expertise--often they recommend algorithms in relation to machine-learning and the future of AI to reduce noise. This is not entirely true, your intuition is pivotal to overcoming challenges, just not at the point or in the way that you may be accustomed.
I highly recommend picking up or downloading a copy so that you may become familiar with the concept, its causes, its effects and how to reduce its influence. This is one of those books you’ll want to read and maintain as a resource in your office, home or digital library. I cannot guarantee that Noise will have an equally profound effect on you as it has on me, but I am planning to incorporate these concepts into upcoming episodes and seasons of FinWizdom to share stories around them.
This review was written by Joel L. Franks, Founder of FinWizdom.
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