S+B: You’re saying that the shadow cast by a worst case overwhelms probabilistic assessment?
KAHNEMAN: We say that people have overweighted the low probability. But the prospect of the worst case has so much more emotional oomph behind it.
S+B: So even experts make cognitive mistakes. But experts and executives in organizations don’t make decisions in isolation. They make decisions in meetings and committees and groups. Do we have the counterpart of System 1 and System 2 thinking in groups as well as individuals?
KAHNEMAN: We know a lot about the conditions under which groups work well and work poorly. It’s really clear that groups are superior to individuals in recognizing an answer as correct when it comes up. But when everybody in a group is susceptible to similar biases, groups are inferior to individuals, because groups tend to be more extreme than individuals.
S+B: So it’s a positive feedback loop. In a group, you get an amplification of the extremes.
KAHNEMAN: You get polarization in groups. In many situations you have a risk-taking phenomenon called the risky shift. That is, groups tend to take on more risk than individuals.
We looked at similar phenomena in juries. You collect judgments from the individual members, then you have them delivered, and then you look at the result compared to the median judgment of the group. It’s straightforward what happens: The group becomes more extreme than the individuals.
S+B: Why does this occur?
KAHNEMAN: One of the major biases in risky decision making is optimism. Optimism is a source of high-risk thinking. Groups tend to be quite optimistic. Furthermore, doubts are suppressed by groups. You can imagine the White House deciding on Iraq. That’s a situation where it’s easy for somebody in the administration to think, “This is terrible.” It’s equally easy to understand how someone like that would suppress himself. There is a tendency and the incentive to support the group. That underlies the whole class of phenomena that go by the label of groupthink.
S+B: What about decisions relating to asset allocation and financial investments? That strikes me as a perfect playground for some of these ideas on the relative sobriety of the individual versus the extremism of the group — such as the corporate investment committee.
KAHNEMAN: No, no. They are not the same dynamics. When you’re looking at the market and investment committees, you’re really talking about the dynamics of competing individuals. We really should separate those cases.
S+B: But I’m looking at the management committee, I’m looking at the jury, and I’m looking at the investment committee, and they all seem to be weighing evidence and evaluating risk. Their similarities seem to outweigh their differences.
KAHNEMAN: I’m a psychologist, so I start at the individual level and I look at individual-level biases or errors. Then I look at the group and I say, What happens in the group? How is the group structured? What are the incentives? What do people do to each other in the group situation that would either mitigate or exacerbate risks? Then there are market things where people respond to each other.
S+B: What you’re describing is an internal marketplace where groups come to a consensus about — or at least some sort of agreement about — the risks and rewards associated with their decisions.
KAHNEMAN: That’s correct. But remember that the internal incentives that shape how the group perceives risks and rewards may be very different from the reality of the risks and rewards in the external marketplace. Those incentives can distort risk perception.
S+B: Do you think the dysfunctions of group decision making are worse than the cognitive dysfunctions of individual decision makers?