Noise: A Flaw in Human Judgment

by Daniel Kahneman

More broadly, our sense of understanding the world depends on our extraordinary ability to construct narratives that explain the events we observe. The search for causes is almost always successful because causes can be drawn from an unlimited reservoir of facts and beliefs about the world. As anyone who listens to the evening news knows, for example, few large movements of the stock market remain unexplained. The same news flow can “explain” either a fall of the indices (nervous investors are worried about the news!) or a rise (sanguine investors remain optimistic!). When the search for an obvious cause fails, our first resort is to produce an explanation by filling a blank in our model of the world. This is how we infer a fact we had not known before (for instance, that the manager was an unusually kind person). Only when our model of the world cannot be tweaked to generate the outcome do we tag this outcome as surprising and start to search for a more elaborate account of it. Genuine surprise occurs only when routine hindsight fails.