Monday, August 8, 2011

Can a hedge fund eliminate human biases in reasoning?

One would imagine that organizations that make money through superior reasoning would develop practices and processes that reduce suspectibility to biases. And it turns to be so! The example is provided in recent New Yorker article on Bridgewater, the richest and strangest hedge fund on the planet. The owner of the fund, Ray Dalio, takes biases very seriously. The attempts of the organization to keep human tendencies at bay make the organization seem like a cult. Reporting by John Cassidy, quoted from New Yorker (within fair use):

Dalio asked for another opinion. From the back of the room, a young man dressed in a black sweatshirt started saying that a Chinese slowdown could have a big effect on global supply and demand. Dalio cut him off: “Are you going to answer me knowledgeably or are you going to give me a guess?” The young man, whom I will call Jack, said he would hazard an educated guess. “Don’t do that,” Dalio said. He went on, “You have a tendency to do this. . . . We’ve talked about this before.” After an awkward silence, Jack tried to defend himself, saying that he thought he had been asked to give his views. Dalio didn’t let up. Eventually, the young employee said that he would go away and do some careful calculations.

One day, I drove to Westport and sat in on a management-committee meeting, which had been set up for the purpose of “getting in synch” with a recent recruit, whom I’ll call Peter and who had come from a big financial firm. All nine members of Bridgewater’s management committee were sitting at a long wooden conference table. Peter, a lean man with fair hair, sat stiffly near the front: he looked like somebody anticipating a root canal. Jensen and McCormick were nominally in charge, but Dalio took over, telling Peter that, during a previous management meeting, he had answered emotionally in response to questioning from Jensen. “This is a common thing when somebody’s getting probed,” Dalio said. “Because the amygdala gets stimulated and you have that emotional reaction.” Peter agreed that he had become upset, especially when he sensed he was being accused of misleading his colleagues. “I felt in some sense my integrity was being attacked,” he said. “That’s when things spiralled out of control.” 

Dalio walked to the front of the room, where he wrote on a whiteboard, “FELT,” “INTEGRITY,” and “MISLED.” “?‘Felt’ is the key word here . . . and it’s a challenge for people,” he said. After a bit more discussion, he went on, “What we’re trying to have is a place where there are no ego barriers, no emotional reactions to mistakes. . . . If we could eliminate all those reactions, we’d learn so much faster.” (my emphasis)

Do social processes set up in organizations trump psychology? Or is Dalio's attempt to make humans non-human a futile undertaking? I believe we have good evidence that social contexts do matter, and the social conventions and patterns of conversation to some extent override psychological tendencies when people reason discursively. But there are limits to everything and Bridgewater seems a bit freaky (you can check their 'Principiles' out; they might be handy if you teach org. culture). But they are by some acocunts the most successful organization in their field, and one cannot rule out the possibility that it is because they have engineered a solution that might be accounted for through sociology of reasoning.

Many organizational processes might help actors overcome individual-level 'deficits' in reasoning, such as those identified by behavioral economists. For example, by simply requiring managers to provide explicit justifications (verbal or numeric) for choices they make can reduce the use of biased heuristics associated with non-reflective reasoning. On the other hand, interaction situations tend to lead to all kinds of other unproductive patterns in reasoning (e.g. social desirability bias). There are nice lists of individual-level biases (e.g. by Stancovich, ref at the end), but I am not aware of a good summarizing review on organizational or group-level effects on reasoning.

The passage quoted above is a pretty dystopic vision of future workplace, is it not?

Stanovich, K. E. 2009. 'Distinguishing the reflective, algorithmic, and autonomous minds: Is it time for a tri-process theory?' in In Two Minds: Dual Processes and Beyond. (eds), 55-88. Oxford, UK: Oxford University Press

PS. Thanks to a visually giften friend of mine, I got some tips on making the blog more readable.
PPS. I accidentally called Bridgewater 'Blackwater'. Bridgewater is the hedge fund run by Dalio. Blackwater is the American mercenary group (now known as XE) where employee recreation allegedly involves murdering civilians.

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