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 Milestones

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

COVID-19 tracing apps: MEPs stress the need to preserve citizens’ privacy

Coronavirus: Commission launches data sharing platform for researchers

Mental health in times of a pandemic: what can each individual do to lessen the burden?

Can we put a price on clean air? Yes, we can

EU security and defence industry prepares positions for ‘producers’ and ‘customers’

Here’s how the EU is doing on gender equality

UN urges protection of indigenous peoples’ rights during migration

UN agencies welcome green light for Rohingya projects in northern Myanmar; urge ‘more effective access’

Combatting terrorism: EP special committee calls for closer EU cooperation

Italian elections: a long political limbo is ahead

The European Sting @ European Business Summit 2014 – the preview

The dangers of data: why the numbers never tell the full story

How climate change sparks innovation for fragile communities

Car rentals: EU action leads to clearer and more transparent pricing

How to build deforestation-free supply chains: lessons from Indonesia

Financing economic recovery, written by United Nations Under-Secretary-General

The Shifting Rhythms of Harmonious China: Ancient, Modern & Eternal

Alternative proteins will transform food, mitigate climate change and drive profits. Here’s how

Coronavirus: How worried should we be?

The online junk information grows, but so we shall

Somalia advancing towards ‘inclusive and peaceful future’ for women, deputy UN chief

We should look to nature for solutions to the global water crisis. Here’s why

Coronavirus: Commission boosts urgently needed research and innovation with additional €122 million

GSMA Mobile 360 – Africa on 16-18 July 2019, in association with The European Sting

Apple’s tax avoidance scheme remains as creative as their new iPhone

Polluted lungs: health in the center of environment discussion

A Sting Exclusive: “The Chinese economy is steady and moving in the right direction”, Ambassador Yang of the Chinese Mission to EU underscores from Brussels

Mobile technology saving lives: changing healthcare with simple technology solutions

Social Committee slams the 28 EU leaders for false promises

Turning challenge into opportunity on the course to becoming the first climate-neutral continent

Main results of European Council of 18/10/2018

How artificial intelligence is redefining the role of manager

Local innovation, international impact: SMEs and the ITU Telecom World Awards

What makes a great CEO? The people they surround themselves with

Historian Niall Ferguson on what the pandemic means for the global economy, geopolitics – and parties

EU allocates over €22 million to help Palestinians in need

Digital business is Europe’s best hope to get back to growth

Mental Health of Health Professionals Facing COVID-19

How blockchain can cut the cost of new medicine

Trump asked Merkel to pay NATO arrears and cut down exports ignoring the EU

How digital can transform healthcare in Asia for millions of people

The Venezuelan exodus to Roraima and its repercussions

Criminals thrive on data abundance – here’s how we’ll catch them

Brexit kick-off: a historic day for the EU anticlockwise

UN food relief agency airlifts aid to DR Congo province hit by Ebola outbreak

EU Migrant Crisis: Italian Coast Guard Headquarters and Italian Navy to give host national opening addresses at Border Security 2016 in Rome

Paris is building the world’s greenest business district. What can other cities learn from it?

EU trade agreements: delivering new opportunities in time of global economic uncertainties

Women outliving men ‘everywhere’, new UN health agency statistics report shows

What universities can learn about citizenship in the COVID-19 pandemic

Libya: UN Mission condemns deadly attack against police in country’s south-east

Human rights: Chad, Haiti and Armenian prisoners of war in Azerbaijan

How COVID-19 accelerated the shift towards TradeTech

The key takeaways of G7 Summit in Canada

AI strawberries and blockchain chicken: how digital agriculture could rescue global food security

This is the hidden connection between smuggling and climate change

The secret to Bangladesh’s economic success? The Sheikh Hasina factor

EU steps up its strategy for connecting Europe and Asia

‘Alarmingly high’ number of children malnourished worldwide: UNICEF report

Being blinded by labels stops social change. Art helps us see a better future

More Stings?

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