Business leaders have the power to craft policies and guidelines that govern the lives of people at work – from the way they are hired, to the way they are promoted.

But just how much of these decisions are tainted – not only by the leaders' own biases – but also by the variability of their judgments? In other words, their lack of consensus with other stakeholders on what the results of the hiring or promotion process should be.

In this exclusive interview, Nobel Prize winning psychologist Daniel Kahneman explains how decision making in the workplace is a process prone to error and subjected to what he calls "noise". It's a topic that the best-selling author of Thinking, Fast and Slow will be discussing at the People Matters TechHR Singapore Conference 2022.

We caught up with Daniel to uncover why he believes organisations should borrow the metaphor of a factory – one that follows strict procedures and quality control measures – as they structure their collective decision making process, and how noise and bias affect how companies formulate policies and programs for their people. 

How do noise and bias influence decisions on people policies?

There are different decisions made by HR professionals. Each of these decisions is susceptible to bias. There are biases of two kinds. There are errors such as cognitive biases, which are primarily the kind of biases that I have been studying. There are also biases, such as discrimination against groups. Both types are important to HR.

Biases are systematic errors. Individuals can be biased and the organisation as a whole can be biased in one way or another. But noise is a new problem, to which I am paying much attention recently.

Noise is the problem of disagreement among people within the organisation in their judgments when, in fact, we would expect them to agree. Let me give you an example. When there is a candidate for hiring, you really would not want the decision – of whether to hire or not – to be a lottery. That depends on who the person is and who does the hiring.

There are differences among, for example, interviewers and the HR personnel who make hiring decisions. Those differences, that variability in the judgment of particular cases – this is noise and it's a major problem because there have been many studies demonstrating a large amount of disagreement on evaluating candidates.

Another place where you'll have a problem with noise is in the evaluation of performance. As it turns out, the evaluation of performance is a highly subjective matter. Different people looking at the same performance are going to evaluate it differently. That we know; there is a lot of research on that.

In hiring and evaluation, there are issues of both fairness and efficiency. It is a matter of fairness, certainly to employees, to be evaluated in a way that is as strict as possible. Any lottery there is quite unacceptable.

There are issues of fairness in hiring as well. That again, the lottery is unfair. So, one scene that I'm emphasising recently is the focus on noise as a source of errors. There is a lot of noise, both in hiring and evaluation.

Problem solving and critical thinking are regarded as skills of the future. How do they shape decision making in the workplace?

The higher the executives are in the corporate hierarchy, the more complex the problems are, which they are called upon to solve. There isn't a single unique way of making decisions, but there are some general principles that distinguish good decisions from those that are less so. Let me give you a few examples.

Covering all the relevant evidence, making sure that you have all the facts before you make a decision – that is an important aspect of the decision itself. The decision maker is responsible for collecting the information needed to make an informed decision.

Then there is an issue of prioritising different dimensions of the problem. And here, again, there is room for a lot of mistakes. To align the preferences of the decision maker with the needs of the organisation.

That is the problem for the higher-ups in the organisation to determine incentive and create an atmosphere. Leaders are, to a large extent, responsible for the quality of the decisions made by people who they think they control.

When they create an atmosphere of fear, they're going to make worse decisions. Then they're going to get less truthful information from their employees. There are issues of the culture of decision making within organisations. There are many issues of procedure and we tend to emphasise good procedures for decision making.

Good procedures for decision making are efficient in the sense that they don't take too much time. But they are designed to make maximal use of the knowledge available within the organisation to tackle problems and ensure relevant dimensions are given proper emphasis; that the priorities of the organisation are respected in individual decisions.

All that is an issue of decision design, sometimes called 'human engineering'. You can look at any organisation as a factory that produces decisions. If you think of it as a factory that produces decisions, then the processes become important. You want to have a clear understanding of the process that produces the decision, then issues of quality control become obvious. 

There is growing discourse urging leaders to start managing their organisations with greater empathy. How does the concept of empathy affect executive judgment, or how we analyse situations and act on them?

It's well understood that the leader of an organisation has the responsibility to make decisions and supervise the implementation of those decisions. But their other responsibility is to keep the team in touch psychologically and keep the team efficient and focused on their tasks.

For the second of these responsibilities, empathy is essential. That is, some understanding of what is going on and what is the effect you're leaving on people. That is where empathy is needed. And without empathy, you get people who may be efficient in instrumental ways, but their teams are not going to be maximally efficient.

Zooming in on the challenges of today's workplace, what leadership trends do you see?

There are diverse functions of leadership, the instrumental ones and the team-building and team maintenance responsibilities. Different leaders have problems in one or the other of these areas. That is common. No leader is perfect and there is room for improvement. Leaders differ greatly from one another. 

The theme of this year's TechHR Singapore Conference is "Rethink what's possible". How is Daniel Kahneman rethinking what's possible – whether on a professional or personal level?

It's really keeping an open mind to changing situations. So, for my part right now, I'm absolutely fascinated by developments in some areas, primarily artificial intelligence. The development of AI is happening very rapidly, and it's going to have a profound impact on many areas of society. And I'm trying to follow those as best as I can.