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Your Decision-Making Is Flawed, But It's Not Your Fault

4 21 16

I recently read the book Noise: A Flaw in Human Judgment and haven’t been able to get it out of my head.

The premise is simple. According to co-author Daniel Kahneman, “Wherever there is a judgment, there is noise — and more of it than you think.” Noise refers to any information or activity that prevents someone from making an accurate judgment.

Here’s the problem: Noise is everywhere, hard to recognize and often ignored. It leads to market inefficiencies and costly decisions. However, with the right tools, it’s possible to overcome.

Noise is inescapable. You can find it in medicine, weather forecasts, forensic science, prison sentencing and sports, just to name a few. A great example is underwriting. Underwriters who quote premiums are supposed to use uniform rules to make consistent judgments. (Spoiler alert: They don’t).

Even when presented with identical information, underwriters rarely come to the same conclusion. In the book, the authors performed a noise audit on an insurance company. They found the median difference in underwriting was 55%. That means when one underwriter would set a premium at $9,500, another underwriter would set it at $16,700. For the record, most executives at the company predicted a variation of 10% or less.

This scenario is a nightmare for the insurance company. When a........

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