Three tips for breaking through bias and seeing evidence more clearly

iphone 19

(Paul Hanaoka, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Alex Edmans, Professor of Finance, London Business School


Business has lost the public’s trust, on both sides of the Atlantic and Channel. As a result, regulators are implementing overdue reforms to ensure that business works for all of society. These include changes to pay practices and disclosure, new corporate governance and stewardship codes, and potential restrictions on share buybacks.

Advocates for reform aim to base their proposals on evidence. In a world where fake news abounds, surely this attention to evidence should be applauded?

Not necessarily. One of the most dangerous phrases is “research shows that …”. Given the huge range of available studies, you can almost always find research to show whatever you’d like. As I explained in a recent TED talk, What to Trust in a Post-Truth World, this is a particular issue due to confirmation bias – the temptation to accept evidence that supports your opinion, regardless of its quality. Since existing views on business are strong, flimsy studies can become influential if they support these views.

Here’s a few examples. A widely quoted statistic is that 91% of US profits went to share buybacks and dividends. According to the author: “[T]hat left very little for investments in productive capabilities or higher incomes for employees.” This statistic makes no sense. Profits are after deducting wages and intangible investments such as R&D and advertising. That’s like saying “the kids can’t have had much to eat because their plates are empty” – they’ve already eaten, which is why the plates are empty. But despite this basic mistake, this statistic is commonly cited, since it confirms common views on share buybacks.

In the 2016 House of Commons inquiry into corporate governance, a witness quoted a study which “found that firm productivity is negatively correlated with pay disparity between top executive and lower level employees”, referencing a 2010 draft. The finished version had actually been published three years before the inquiry. Having gone through peer review and tightened its methodology, it found the opposite: “Firm value and operating performance both increase with relative pay.” But despite a separate submission highlighting the error, the inquiry’s final report still referred to “clear academic evidence that high wage disparities within companies harm productivity”. The House of Commons Executive Pay report, released this week, quoted another unpublished study that makes a similar claim, but omitted the evidence presented at the prior inquiry.

Last year’s Corporate Governance Code consultation referred to “clear evidence that greater female representation in the boardroom and senior management has a positive impact on performance”. The “clear evidence” cited a single non-peer-reviewed paper, with elementary omissions such as not including dividends when calculating stock returns, controlling for other factors, or checking statistical significance. This does not mean that diversity initiatives are unwarranted, as I’ll shortly stress.

So what should we do? Faced with reams of available evidence, how do we know what to trust? One tip is to draw particularly from studies published in the most stringent peer-reviewed journals, to reduce the risk that a paper is biased or flawed. As the paper on pay disparity shows, peer review isn’t simply a rubber stamp, but can overturn a paper’s conclusions. Now peer review is far from perfect, because there’s a vast range in the quality of reviewing standards. But quality can easily be checked using a list of the most stringent journals, such as the Financial Times Top 50.

Every study starts off unpublished. So the second tip is, for an unpublished paper, to scrutinize the researchers’ credentials. Again, this can be easily done, for example by looking up their institution. This isn’t to be elitist, but to recognise the importance of evidence quality – just as we’d particularly trust the medical opinion of a leading hospital. Often, we latch on to a study because we like the findings, regardless of who wrote it.

The third tip is to place more weight on balanced opinions. There are two sides to almost every issue. But authors have the incentive to present only one and claim “clear evidence”, to give a more convincing message. Such one-sided views are likely misleading, and the reader should be less convinced by an author who isn’t secure enough to acknowledge the other side. The Norwegian Sovereign Wealth Fund’s position papers on corporate governance all include the arguments against their position. This gives confidence that they reached their stance after a careful consideration of both sides.

But evidence doesn’t mean that only one view is right. Even if we all agree on the price and characteristics of different cars, different people may buy different cars given their different preferences on price, fuel efficiency and safety. Similarly, even if higher pay ratios improve firm performance, this doesn’t mean they’re desirable. Some citizens may view income equality as more important than firm performance. Evidence only aims to put the facts on the table so that we can understand the trade-offs behind decisions.

 

And for many reforms, evidence isn’t even necessary. Gender diversity is desirable in its own right, and firms should pursue it even without evidence that it improves performance. It would be a sad world if the only reason firms increased gender diversity was to make money – and might hinder initiatives to promote other forms of diversity where there isn’t any evidence.

So evidence may be neither conclusive nor essential. But if it’s used, it should be of the highest quality.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

To realise the full potential of AI, we must regulate it differently

Drug laws must be amended to ‘combat racial discrimination’, UN experts say

‘Continue working together’ UN chief urges DR Congo, as country heads to polls

Do not take the EP’s consent on MFF for granted, says Budget Committee Chair

Students & Allies Unite Globally To Launch #Students_Against_COVID

EU-China: Commission and China hold first High-level Digital Dialogue

Air pollution: Most EU Member States not on track to reduce air pollution and its related health impacts by 2030

5 unexpected ways bicycles have made the world a better place

Post the pandemic: keeping our worlds turning

Big oil’s climate pledges will fail without workforce equality

European welfare states are failing young people

Road safety: Europe’s roads are getting safer but progress remains too slow

Key economic forum in Russia: New technology a ‘vector of hope’ but also ‘a source of fear’ says Guterres

Human Rights Council election: 5 things you need to know about it

6 things to know about press freedom around the world

The Banking Union divides deeply the European Union

Successful carbon removal depends on these 3 conditions

Somalia: UN urges steps to ensure future elections not ‘marred’ by rights abuses seen in recent polls

Parliament wants binding rules on common chargers to be tabled by summer

‘Unprecedented terrorist violence’ in West Africa, Sahel region

What is systemic racism, and how can we combat it?

Mental health at stake: A silent epidemic of 21st century

These are the world’s most fragile states in 2019

ECB: A revolutionary idea to revitalize the European economy with cheap loans to SMEs

Renewed pressures on Berlin to adopt growth policies

Forget 2009, this is the real credit crisis of our time

EU migration crisis again accentuates lack of unity and solidarity among member states

Our idea of what makes a company successful needs to change. And it starts with making waste expensive

Single European Sky: for a more sustainable and resilient air traffic management

Syrians ‘exposed to brutality every day’ as thousands continue fleeing ISIL’s last stand

Coronavirus: EU Civil Protection Mechanism activated for the repatriation of EU citizens

WHO reports ‘very strong progress’ in battling DR Congo Ebola outbreak

The new crisis is already creeping into the financial system

Boris ‘single-handed’ threatens mainland Europe; can he afford a no-deal Brexit?

3 charts that show how global carbon emissions hit a record high in 2018

UN expert condemns new sentence for jailed Venezuelan judge as ‘another instance of reprisal’

6 ways China and the United States could jumpstart trade reforms

London wants to treat violent crime like a disease

This Indian school accepts plastic waste instead of fees

Venezuela: UN human rights office calls for ‘maximum restraint’ by authorities in face of new demonstrations

Junior Enterprises as a solution for Youth Entrepreneurship

Crowdfunding: what it is and what it may become

Climate change: Direct and indirect impacts on health

The EU learns about fishing and banking from tiny Iceland

These technologies are playing a major role at the Cricket World Cup

Most fish consumers support a ban on fishing endangered species, poll finds

Commission supports normalisation in Greece through activation of post-programme framework

Sustainable development demands a broader vision, says new OECD Development Centre report

The West is struggling to hit its climate targets. What would the developing world do differently?

Draghi will not hesitate to zero ECB’s basic interest rate

UN report on Syria conflict highlights inhumane detention of women and children

Financiers can turn the world into a dirty and dangerous place

Progress toward sustainable development is seriously off-track

Ten new migratory species protected under global wildlife agreement

‘Still time’ to stop a ‘bloody battle’ for Libya’s capital, insists Guterres

The Dead Sea is drying up, and these two countries have a plan to save it

Sweden’s forests have doubled in size over the last 100 years

White Coat, Stained red

ECB describes in detail how it exploits the poor

EU summit: Are the London Tories planning an exit from the EU?

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s