Hi, Jacob here again.
As you’re probably well aware, we live in a world today where we collect lots of data from both online and offline businesses. But there are only a few that really use this data efficiently. Everyone is saying that data is the new gold – and I couldn’t agree more – but very few are actually digging it up. We tend to rely more on gut feeling than looking at the data. And even when you look at your data, you’re probably looking at the past.
Qualitive and quantitive questions
You are probably asking yourself a lot of questions regarding the future. Both the bigger ones, but also some recurring smaller ones as well. I make a distinct difference between the qualitative ones and the quantitative ones. The qualitative ones are still best suited to address with your gut feeling and strategic knowledge, but it’s time to hand over the quantitative ones to an AI. Such questions might be:
- How many visitors will come tomorrow (or any other day in the future) and how should we schedule our staff to meet that demand?
- What marketing is actually creating a good ROI?
- How can I be more relevant for each of my customers?
- What products and services should I offer?
- What price should this product have tomorrow?
- How many of this product are we going to sell next month?
- What is actually impacting our sales positive and negative, and to what degree?
These are not easy questions to answer just like that. Especially not using your gut feeling.
Daniel Kahneman, the former awarded Nobel Memorial Prize in Economic Sciences and a notable famous psychologist & economist, perhaps best known for his work with psychology of judgment, decision making and behavioral economics, has made very interesting discoveries about the human brain. He has come to the conclusion, that our brains are not capable of making the right decisions in all situations.
According to the work of Daniel Kahneman, our human brains are not capable of always making sustainable assessments on questions that are based on mathematics and statistics, especially when it comes to businesses. It just gets too complicated, even if you’re a scientist.
When our brains make distortions….
Try to read the question below and answer the question effortlessly. It’s a classic example from his book Thinking, fast & slow of how our brains act when we do problem solving (has nothing to do with business):
“A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost?”
Do you consider yourself to know the answer?
Many people usually answer that the ball costs 10 cents. Is that the same answer you came up with? While this is the answer most people quickly come up with, it is incorrect.
If the ball costs 10 cents and the bat costs $ 1.00 more than the ball, then the bat would cost $ 1.10 for a total of $ 1.20. The correct answer to this problem is that the ball costs 5 cents and the bat costs – for a dollar more – $ 1.05 for a total of $ 1.10.
According to studies at some of the largest and most respected universities (Harvard, MIT Stanford & Princeton) in the United States, the same question about “ the ball and the bat” was asked. On average, 50% of all students answered the question incorrectly. In the population at large, up to 80% answered the question incorrectly.
So if this simple math question is “too difficult” for many of our brains out there, then how should we be able to make assessments of historical data and translate it into what we need to do in the future?
Why do many people come up with the wrong answer?
People often replace difficult problems with simpler problems in order to solve them quickly. In this case, people seem to unknowingly replace the “more than” statement in the problem (the bat costs $ 1.00 more than the ball) with an absolute statement (the bat costs $ 1.00). This makes the bat easier to work with; if a ball and the bat together cost $ 1.10 and the bar costs $ 1.00, then the ball must cost 10 cents.
He describes this type of distortion in our brains extra carefully in his book “Thinking, fast & slow” and at this lecture on YouTube. The book thoroughly describes how we act as if we have two different functions in our brains.
One that works by acting quickly on intuition and previous experiences (quick thinking or system 1). And another one that requires more effort and energy and that can discover and see new patterns in a better way than our function for “fast thinking” (slow thinking or system 2).
First of all – a great book I’m happy to recommend to anyone. The book goes through several early examples and tests on how we act on different types of information. At the same time, it specifically points out our challenges of reading and acting on statistics, as there is far too much information and parameters to take into account in order to make correct assumptions or decisions.
Humans are only experts after the fact
While we become better at executing on different tasks with quality, use our creative sides and build important relationships with other people. As I see it, we should instead let these quantitative questions and tasks be answered and done by a machine.
Kahneman is a strong believer that there is no such thing as an “expert”. I like to tweak that into “humans are only experts after the fact”. Consider these to examples and see for yourself what you believe:
- If you listen to a sports expert on TV, they’re great telling you what just happened. But what else?
- Financial experts are great at explaining what just happened to the stock market. But how are their predictions on what’s going to happen next?
In my opinion, let AI predict your future and let machines act on it automatically once you trust it. Save your gut feeling for the qualitative stuff you haven’t had time for before.