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

How women are transforming the Arab world’s start-up scene

More than half of the global population is now online

The 28 EU leaders care more about fiscal orthodoxy than effectively fighting youth unemployment

Why do medical students need to emigrate to become doctors in 2017?

EU Trust Fund for Africa: Can it be beneficial for Italy and tackle the migration crisis in the Mediterranean?

Refugee crisis update: EU lacks solidarity as migration figures drop

Coronavirus – here’s the public health advice on how to protect yourself

Iran-US attack in Iraq: Guterres pledges ‘active engagement’ in further de-escalation efforts

Germany to re-invent its security position in Europe and a chaotic world

Countries must invest at least 1% more of GDP on primary healthcare to eliminate glaring coverage gaps

The Parliament defies a politically biased Banking Union

Juncker Plan reaches almost €410 billion in triggered investment across the EU

These dogs can smell tree disease – and could help save the world’s orange groves

A Sting Exclusive, the European Commissioner for Energy Günther Oettinger writes for the Sting on “EU Industry: a major energizer”

New book honours UN women who made HERstory

New report says better metrics could have prompted stronger response to the crisis

‘Vaccines are safe’ and save lives, UNICEF declares, launching new #VaccinesWork campaign

6 innovative technologies about to transform our infrastructure

GDPR and the World Cup have these 4 things in common

Austerity lovers to put a break on Renzi’s growth vision for Europe? the Sting reports live from World Economic Forum 2015 in Davos

6 surprising side effects of this year’s global heatwave

How do we build a #sustainableworld?

UN chief condemns terror attack in Kismayo, Somalia

Killings and violence targeting ethnic group in DR Congo ‘may amount to crimes against humanity’

Road injuries leading cause of death for the young, despite safety gains: UN report

What’s needed to ensure maternal health for women in vulnerable populations

COVID-19 underlines the importance of fintech in emerging markets

GSMA Mobile 360 – Latin America at Mexico City: Intelligently Connecting to a Better Future, in association with The European Sting

The hidden downsides of autonomous vehicles – and how to avoid them

E-Governance: A powerful tool to combat, mitigate and sustainably manage disaster risks

Australian solar could power Singapore within a decade

Ukraine’s Poroshenko implicates NATO in his duel with Putin

These 4 trends are shaping the future of your job

EU leading in global agri-food trade

UN, African Union make significant joint commitment to global health

Countries must up their game to reduce low birth weights, warns UN-backed report

EU Commission – US hasten talks to avoid NGO reactions on free trade agreement

Oslo leads the way in ‘Breathe Life’ campaign for cleaner cities in climate change era

Rohingya emergency one year on: UN says thousands of lives saved, but challenges remain

Pedro Sánchez: We must protect Europe, so Europe can protect its citizens

This is how countries compare on gun deaths

The US starts an intense currency war to protect its global standing

Threat from petty criminals who turn to terrorism, a growing concern, Security Council hears

Statistics show the ugly face of youth training schemes

What’s going on in Chernobyl today?

A new generation of women leaders is making waves in the Arab world

“Austerity was not the alternative!”, President Hannes Swoboda of the European Socialists and Democrats on another Sting Exclusive

Global initiative launched to keep top sports events safe from terrorism

Could this electric ferry’s success herald an era of greener shipping?

Coronavirus update: COVID-19 likely to cost economy $1 trillion during 2020, says UN trade agency

From the boardroom to the consulting room: pharma’s role in curing gender bias

State aid: Commission approves €30 billion French subordinated loan scheme to support companies affected by the coronavirus outbreak

Poor Greeks, Irish and Spaniards still pay for the faults of German and French banks

Taxation: Commission refers Germany to the Court for its failure to apply EU rules on VAT for farmers

Where are the charities in the great Artificial Intelligence debate?

‘A trusted voice’ for social justice: Guterres celebrates 100 years of the International Labour Organization

The global economy isn’t working for women. Here’s what world leaders must do

Why business can no longer turn a blind eye to poor vision

The role of employers in the post #MeToo era

Here’s how to achieve growth in the Middle East and North Africa

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