We humans often assess the probability of an event by asking ourselves if there are “cognitively available” examples, (i.e. readily available through memory) as Kahneman (Nobel Prize in Economics) and Tversky demonstrated in a series of papers published between 1971 and 1984, among which the most popular is likely the one entitled “Prospect Theory”.(1979 quoted at page 212 in our book)
The phenomenon highlighted by Kahneman and Tversky is called “availability heuristic” and is one of the very well know cognitive biases that plague us Humans when we are confronted with decisions under uncertainty.
That’s most likely why the 2008 recession was considered unheard of, a Black Swan: just because most people did not remember (were not even born) in 1929! The Black Swan “fad”, as we have demonstrated in earlier blog posts is indeed based on Humans having “short memory” and considering the last events as “unique”.
Sometimes we are forced to use availability heuristics because available data are indeed very scarce and only recently gathered, but reliable statistical evidence will systematically outperform “intuition” when “looking backwards” in time to past events to draw conclusions.
Looking backwards, however, is not enough, actually it is critically limiting and incomplete, when we are confronted with managing risks of corporations and projects. A good risk assessment has to be “looking forward”, examining “classic” scenarios and hypothetical ones, that have not yet occurred, or not yet occurred with larger magnitudes, to make management decisions.
Over the last five decades or so the risk management community has settled on representing the results of Risk Assessments with Probability Impact Graphs (PIGs), risk matrices, “Heat Maps”, which have a number of staggering intrinsic conceptual errors, with potential dramatic consequences on their users. Voices raise in various parts of the world to discuss these fallacies, but they remain for the great par unheard.
The continued “main stream” reliance in using inappropriate techniques like PIGs, and being satisfied of their results, or, using intuition to correct PIGs’ evident fallacies, is simply another manifestation of Kahneman and Tversky explored ways we, Humans, have found to introduce irrelevant criteria in decision-making.
As a matter of fact Kahneman and Tversky have explored in detail how human judgement can be distorted when making decisions under uncertainty: humans tend to be risk-averse when facing the prospect of a gain, and paradoxically risk-prone when facing the prospect of a loss (even if the loss is almost certain to occur)! So, using improper methods like PIGs which almost surely will lead to confusion, losses, poor planning sits well with “main stream” human nature.
So, “now that we know that we do not know how to know better”, the whole idea of building a rational prioritization on top of existing PIGs, as they stand in most industries, or after enhancing them, comes out as a clear winner: by deploying rational prioritization we give a rest to our scientifically proven fallacious intuition, allowing our rational ego to make better informed solutions! Do not be “main stream”: belong to the small elite that adheres t stricter cognitive standards and make you industry thrive and prosper.
We will soon publish a post explaining how you can do that.
