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Wednesday, June 06, 2020

Making it past the “Law of Small Numbers”

Why haste impairs your judgment . . . and what to do about it.

The Law of Small Numbers is at work everywhere in business today. Put simply, it’s the tendency to jump to important conclusions on the basis of very small samples: letting a very little data drive some very big decisions. Why is it so prevalent? Haste, mostly. No one is willing to wait long enough to see whether the immediate outcome is confirmed by long-term results. But you don’t have to be one of them.

Any limited sample of data can be misleading. The smaller the sample, the more the effects of pure chance can skew the results. A few good results, one or two spectacular-seeming successes, can lead to the idea that they represent the basic truth on a project or a person’s ability. It’s the same with setbacks and errors. If things don’t go well immediately, people assume that they never will. So they cut their losses and bail out—perhaps right before the point when those chance-caused setbacks were about to end and the good times start.

Another common outcome of the Law of Small Numbers is a tendency to see patterns where none really exist. What may seem to be an obvious pattern can disappear entirely when a larger sample of data becomes available.

Suppose that you watched someone toss a coin 10 times and it came up heads every time. How sure could you be that he or she had a double-headed coin? Well, not very sure. It seems like a highly significant pattern, but it could quite easily arise by chance. There’s a 50:50 chance of heads coming up on every toss. That chance isn’t affected at all by previous tosses. The probability of getting heads on the next toss is exactly 50%, regardless of whether heads has come up once, ten, or a hundred times in a row.

Most people grossly underestimated how great a part luck, context, and specific circumstances play in our lives. They attribute a series of outcomes to a stable pattern after only a few examples. I’m not saying that everything is down to chance. That’s clearly not the case. Some choices and actions have a greater likelihood of success than others. But which ones? To decide which actions do indeed have the better track-record takes time and large samples of data. Only when you have tracked results for a significant period can you be fairly certain that the effects of chance can be isolated and removed from your judgment.

The more people work under pressure—the more that they feel they are judged purely by short-term outcomes—the harder it becomes to sort out what is truly beneficial or harmful from what merely seems so for a short time.

Many executives today stay in their jobs for less than two years. That might be enough time to discover whether someone in a job requiring limited skills is competent, but it’s not nearly long enough to see whether significant department- or corporation-wide decisions are soundly based. Worse, it encourages the executives to focus purely on “quick wins,” since they know that anything long-term won’t yield results until after they have departed for greener fields elsewhere; and very few people are willing to work hard to chalk up an achievement for their successor.

Life is not a short-term gamble

You may not be able to change the corporate culture right away (that takes time too!), nor affect how long you are kept in the same role, but you can surely avoid taking short-term, overly-risky gambles on inadequate data in your own life and work choices.

The key is always allowing enough time, and collecting enough data, to allow for the ever-present element of chance. It’s possible to develop a wonderful reputation for ability on the basis of a single result, much of which was due to luck. If that happens—and you gratefully accept it and join in the assumption that you are, indeed, brilliant—you’re creating a set of expectations that you may come to regret. Living up to a result that wasn’t really down to you is a recipe for extreme stress.

Bear this truth in mind too when you’re called upon to make judgments on others. The myth that anyone can make some kind of near-infallible judgment of character and ability on the basis of a single meeting is just that—a myth. Prejudice can definitely be near-instant. Just don’t kid yourself that some kind of magical intuition operates on first meeting.

And if you claim to have proof of the power of instant judgments based on intuition from instances in your own life, remember the ten coins that came up heads in a row. Chance demands that there will be some occasions when a snap judgment turns out to be correct. A bet on odds of many millions to one against will turn out positive sometimes (like winning the lottery). You could buy a lottery ticket tomorrow—just one—and win the jackpot. But that has no effect on the odds for the millions of people who spend tens of dollars on lottery tickets every week, often for decades, and never win a bean. How many successful instances of your intuition are needed to establish that it should be trusted? Many hundreds probably. How many can you recall? How many unsuccessful intuitions have you forgotten?

The less time that you give to any decision, the more of the outcome that you are leaving to chance. Slowing down is the best way to lower the risks in your life; hurrying the best way to increase them.

If you're really in a rush, you could always flip a coin.



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4 Comments:

Herman Najoli said...

I have to run in a few minutes so I hope I will do justice to this comment. A few weeks ago I was part of a leadership simulcast organized by John Maxwell, founder of Injoy. One of the speakers was Malcolm Gladwell, a cultural analyst and bestselling author. Malcolm said that many times leaders are hampered from making sound decisions because they spend so much time, money and resources on mining data and information. He gave a story of an art piece that a museum bought in New York after taking a long time to verify that it was an original, only for a group of art experts to come in and say it was a fake on first look. I should add that the experts didn't flip a coin - they simply gave it one look and said that it was a fake yet this museum had spent so much time, money and resources in mining data and information about the piece. His main argument was that being careful, cautious and deliberate is wrong. We need to be instinctual. Less information enables superior decision making. Take away information and data and you can make better decision makers. He said that what we need is expertise and experience, not data and information. What do you think of this and how do you reconcile his argument with your post?

1:45 PM  
Carmine Coyote said...

Hi Herman.

Thanks for posing such a useful question.

In his urge to produce another best-seller, Mr. Gladwell has confused several distinct factors.

Yes, organizations and executives do sometimes spend far too much time collecting data. This has nothing to do with the soundness of the eventual judgment. It has everything to do with fear and risk-aversion. By collecting vast amounts of data, they hope that either the "right" answer will pop out on its own, or they can at least claim credit for conscientiousness. The process also has the benefit of putting off the actual decision for as long as possible.

In the case of the art piece, this "snap" judgment has nothing whatsoever to do with intuition or being instinctual. The "instant" judgment of the experts that the piece was a fake is based on their knowledge, which has taken years and years to build up. What you see is the tiniest tip of the very top of the iceberg. Without all the time taken to amass that knowledge, their "instinctual" or intuitive judgment would be no better than yours or mind — that is, just a blind stab in the dark.

You never make a better decision by taking away the information. How could you? All that leaves is magic. And expertise and experience are data — just not the kind of data that you can store in a computer.

Mr. Gladwell is a prime example of the malign effect of the Law of Small Numbers. He bases huge conclusions on purely anecdotal evidence, much of it confused or irrelevant.

Of course, people will still buy his book. Why? Because it seems to offer exactly what people long to have: a magic way of being right without making any effort or learning anything in advance.

Pah!

Keep reading, my friend.

3:11 PM  
Rise said...

I hate it when people use 'asap' when talking about deadlines. It is like saying, I don't have any concrete knowledge of how much time it should take so use your judgment. People use it in communication too when they need something from others. And they get disappointed when the other person's asap is not same as their asap. Another thing I noticed is that people want black-boxes these days. Just shove something in from one-side and you get what you want from the other side. And the demand for a black-box asap produces the worst results/products.

8:51 PM  
Carmine Coyote said...

Great comment, Rise. Thank you.

You are absolutely right about the lust (desire is to mild a word) for "black boxes" of every kind. That's another symptom of the constant urge for speed and supposed simplicity.

When you couple this with constant haste and inattention ("asap," as you rightly say, takes no thought), it's amazing that we don't get more cock-ups and messes in organizational life than we do.

Keep reading, my friend.

10:02 PM  

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