Everyone, everywhere needs better access to analytics because when it comes to making decisions we are far from rational. That’s what I got from reading Thinking, Fast and Slow by Nobel Prize Winner, Daniel Kahneman. The main culprit is what is termed System 1, which makes us jump to conclusions, search for facts that support our accepted world view and saves us the from using System 2 – logical, rational deduction – which most of the time is really too much effort for us. Here’s an example from the book.
If I tell you that Tom is a graduate student at the main university in your state and ask you to rank a list their departments according to which one you think Tom is enrolled in, most likely you will quickly go down the list and rank them according to how big you think they are. All good common sense. But if I also tell you that last time Tom did a personality profile, he came out as an introvert, most of us will fall into stereotyping and rank engineering and computing schools at the top of our lists.
This is far from rational, as in real life. The probability is that Tom is still enrolled in one of the bigger schools and all we should do is slightly adjust our ranking to account for the extra piece of information about his personality profile. But no System 1 says it knows best and saves us the hard work of thinking about for ourselves. But the outcome is we make a duff decision.
Exactly the same thing happens when we think about risk. In experimental conditions people were asked to estimate the relative frequency of causes of death, repeatedly comparing two causes selected at random. Here are some of the findings when compared to published health statistics at the time:
- 80% of respondents said accidents caused twice as many deaths as strokes, when in real life strokes are responsible for twice as many deaths.
- Tornados were seen as more frequent killers than asthma although the latter accounts for 20 times more deaths.
- Death from accidents were judged to be 20 times more likely than death from diabetes, but the true ratio is 1:4
The author concludes that we’re gullible and prone to base our decision on what we see and read in the media, where sensational and extraordinary take precedent over ordinary and routine. So, for example, our System 1 tells that terrorism is a really big risk and we ought to be spending vast sums on anti-terrorist measures. However the truth is that even in countries with high levels of terrorist activity such as Israel, there has never been a week when the number of deaths from terrorism exceeded the number from routine road traffic accidents.
So what equally simplistic misnomers do our collective Systems 1’s make us hold as sacrosanct in our own business – and will pervasive and easy to use analytics help us to overcome System 1’s natural laziness and give us insights that help us to get out of our collective ruts. Based on how I seen executive’s eyes pop out when they are first shown detailed net profitability reports generated by solutions such as SAP Profitability and Cost Management that have overturned their accepted world view of which products and customers make the most profit, I’d say the answer is definitely ‘Yes’.
So analytics for all and away with System 1.