Hong Kong’s overly cautious coronavirus policymakers must seek to drown out the ‘noise’
- The work of Nobel Prize winner Daniel Kahneman has drawn attention to how various, sometimes irrelevant, factors and information influence decision-making. Hong Kong’s 21-day quarantine might be the result of such noise
It is a truth, now universally accepted, that investment opinions and decisions are made both intuitively fast and analytically slow. Daniel Kahneman’s book Thinking Fast and Slow revolutionised how we think about how we think.
For those looking to wade through Kahneman’s small-print, 500-page life’s work, I recommend starting with Michael Lewis’ The Undoing Project, which explains the relationship between Kahneman and his friend and collaborator Amos Tversky, who sadly died before he could receive the Nobel Prize that he would have won with Kahneman in 2002.
Kahneman illustrates our natural human biases – that we dislike losing more than we like winning (the prospect theory), that our decisions are based on the information in front of our noses (availability), and that we match new situations to our experience of old ones (representativeness). The good news is that, despite our biases, most of our decisions are about right.
His latest book, published last month at the age of 87 together with eminent behavioural economist Cass Sunstein, and former McKinsey partner Olivier Sibony, is called Noise. It is subtitled A Flaw in Human Judgment and illustrates the striking variability of judgment by different seasoned professionals with the same information.
The US judge Marvin Frankel was so disturbed by defendants getting wildly different sentences for the same offence that, in 1974, he asked 50 judges to pass sentence on a hypothetical extortion case. The jail sentences ranged from three years to 20. Similarly, I have worked in investment teams where individual experienced fund managers have delivered variable results in the same market conditions.
Variability of opinion is due to the different emphasis we place on parts of the same evidence. That difference is driven by our emotion, values and upbringing, which impart biases to our thinking. The truth lies within the information flow, but distracting noise hides it in plain sight.
Although Kahneman, Sibony and Sunstein define noise as the variability of decision-making, it is perhaps more simply thought of as distracting information, which may be true but irrelevant, or misleading, or fake – or a combination.
In narrative finance, we study the information flow from stories in the market that combine the underlying truth and the noise in such a way that it makes the truth hard to spot. Asset prices are made within a non-linear, complex, adaptive system, which operates as a steady state.
When the underlying truth finally becomes obvious, the steady state fails, the system reaches a critical point, and we get a market crash. The global financial crisis was precipitated when the noise clouds parted to expose the mountains of subprime debt.
While the virus causing Covid-19, if left unchecked, causes widespread illness and death, its reproduction rate can be controlled with measures tailored to the population. However, in such a situation, noisy narratives can feed fears – even though the Pfizer vaccine is the safest and most effective in decades.
The poor ability of humans to judge the probability of catching and dying from Covid-19 led some parents to lock their children (and their parents) away for a year, perhaps with even more serious consequences. Public policies have shuttered economies following knee-jerk decisions based more on noise than the underlying science.
Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster and financial expert witness