Rational bias

Nate Silver writing in The Signal and The Noise:

“When you have your name attached to a prediction your incentives may change. For instance, if you work for a poorly known firm, it may be quite rational for you to make some wild forecasts that will draw big attention when they happen to be right, even if they aren’t going to be right very often. Firms like Goldman Sachs, on the other hand, might be more conservative in order to stay within the consensus.

Indeed, this exact property has been identified in the blue chip forecasts: one study terms the phenomenon “rational bias”. The less reputation you have, the less you have to lose by taking a big risk when you make a prediction. Even if you know the forecast is dodgy, it might be rational for you to go after the big score. Conversely, if you have already established a good reputation, you might be reluctant to step too far far out of line even when you think the data demands it.”

The greater your reputation, the more conservative you are.

Hey. I’m Alex Murrell. I'm a Planner at Epoch Design in Bristol where I help deliver highly creative, innovative and effective pack, instore and online communications for some of the world’s biggest FMCG brands. Want to know more? You can find me on Twitter or LinkedIn.

Leave your comment