30/04/2021 - 14:00

Gut feel no match for data

30/04/2021 - 14:00

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Cognitive bias gets in the way of making accurate predictions about a business’s future opportunities.

Gut feel no match for data
Most people are terrible at making predictions. Photo: Stockphoto

How well a business anticipates future events is crucial in determining what it does in the here and now.

Every day, we make thousands of micro predictions.

For instance, when driving a car, we are constantly making predictions about complex interactions with other vehicles, pedestrians, traffic lights and cyclists.

For thousands of years, making predictions has been essential to our survival because it allowed us to react faster to sudden changes.

Our five senses, together with learned experiences, provided early humans with a better situational awareness of their surroundings.

How well humans interpreted these stimuli determined if their gene pool survived.

Even though we are (mostly) no longer a hunter-gather society, predicting what lies ahead remains deeply ingrained within the human psyche.

Urbanised humans have transferred this evolutionary survival trait into a compulsive need to predict everything that occurs within their world.

Our lives are now bombarded with longer-term predictions on the weather, economy, climate, population, sporting teams, politics, health, and so on.

Unfortunately, most people, including the so-called experts, are terrible at making these types of predictions.

Human evolution has bred survival traits that reward people who have a positive outlook on the future.

People who are optimistic believe that the things they want to happen will happen.

This keeps people motivated no matter how many impediments are placed in their way.

We have learned to overcome adversity and not lose hope.

In general, this means we have an inherent unwillingness to predict undesirable things.

People think bad things like illness, injury, death, bad investment decisions are less likely to happen to them than to others.

This leads most of us to distort long-term predictions in ways that are consistent with our preferences, prejudices, and life experience.

These cognitive biases make it hard for businesses to make accurate forecasts that can build and sustain a competitive advantage.

Some business leaders now recognise that the first step in trying to forecast the future is ensuring properly leveraged business data leads the way, rather than their gut feeling.

They are using predictive analytics to provide insights about their customers, employees, competitors, and business environment.

Predictive analytics uses software tools and mathematical models to sift through a business’s current and historical data to detect trends and forecast events and conditions in the immediate and near future.

Of course, predictive analytics cannot mitigate all future business risks.

As COVID19 has reminding us, there is no guarantee the conditions in the past will continue in the future.

Also, at some point people will be tasked with the job of evaluating the results generated by predictive analytical software.

For most of us, our cognitive biases will lead us to subconsciously look for evidence in business reports to support our own ideas.

Confirmation bias leads to key information within reports being overlooked.

In 2011 the Intelligence Advanced Research Projects Activity, which undertakes research for the US intelligence community, funded a forecasting tournament aimed at identifying methods that could accurately predict future events.

The winning team, the Good Judgment Project led by Philip Tetlock (who was co-author of the book Superforecasting: The Art and Science of Prediction), outperformed the forecasts made by intelligence experts with access to classified data.

Mr Tetlock’s Good Judgment Project found that a small number of people are exceptionally skilled at assigning realistic probabilities to possible outcomes, even on topics outside their primary subjectmatter training.

Called super forecasters, these people tend to share certain personality traits.

They are intelligent, possess a healthy amount of cynicism (which keeps them permanently locked into an alpha testing mode), always ask questions, evaluate new data, and update their predictions.

They are open-minded and curious, which allows them to see problems from all sides and overcome preconceptions in the light of new evidence.

They do not take things personally, show traits of humility, and view their colleagues as sources of information rather than peers to be convinced.

There are numerous motivated people with the capability to run the day-to-day operations of a business.

Only a few can also sift through trends and seemingly unrelated information and draw accurate conclusions about future outcomes.

The past tells us that change is certain. The present provides a moment to prepare for change. The future has an annoying habit of discarding the brittle and rewarding the resilient.

David Kobelke spent 15 years managing CCIWA’s Australian industry participation unit

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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