April 18, 2021
Author: Guy Soreq
In 2013, a group of people participating in a study were shown charts presenting 90 days of wheat prices. The group was asked to predict the price in 10 days. Half of the group was told that they were “bakers” who would profit if the price of wheat fell, while the other half were told that they were “farmers” who would make money if the price of wheat rose. Apart from this role classification, all information presented to the participants was the same. The results of the study have a lot to say about unconscious human behavior.
Of the participants assigned to be a farmer, 63% predicted higher-than-average prices. Among those assigned to be a baker, nearly 62% predicted lower-than-average prices. Each group, both farmers and bakers, were more likely to make predictions favorable to their role. In other words, risks were systematically underestimated, while rewards were overestimated. The term that the researchers used to describe the behavior: wishful thinking.
Most of us are familiar with the phrase, but few readily admit how these sorts of biases may affect our own behavior. A feed mill may lock in a certain price via contract believing it to be beneficial in the long term against rising prices. A distributor may be tempted to continue building stock after the same strategy worked amidst rising prices in the months that passed. After many years in the industry, it is natural that we rely on intuition to make these kinds of decisions each day. But are they free of bias? According to researchers: no.
So what are we to do? Our intuition, while perhaps based on many years of experience, must be coupled with good data. Only then can we challenge our assumptions and those of our team. Data is powerful, and it can be what differentiates us from those acting on feelings alone. Leave the wishful thinking to your competitors, and arm yourself with data.
Photo by Dayne Topkin on Unsplash