Managing Cognitive Bias & Framing Illusions in Assessing the Future of Energy
Daniel Kahneman (left) , Amos Tversky (right)
The concept of cognitive bias and framing illusions has been the subject of psychological interest for many years. Some modern work delving into this area includes research by 2002 Nobel Prize winner in Economic Science, Daniel Kahneman and his late close research partner and friend, Amos Tversky. This work centered on integrating psychological research into economics en-route to coming up with insights into what is commonly referred to as behavioral economics.
The term cognitive/cognition itself refers to the mental processes of perception, memory and judgement e.g. the “automatic” mental processes involved in driving a car under ordinary road circumstances. This differs from but is closely related to emotional mental processes which are linked to feeling e.g. mental processes involved in generating the sense of feeling anxious and fearful in early stages of learning to drive.
Cognitive bias therefore refers to systematic ways in which decisions made by individuals are influenced/biased by the context and framing of information absorbed by or presented to them. An outcome of this is that certain heuristics or shortcuts are used by our brains to make quick decisions and judgements when faced with complex information. Since these shortcuts can be influenced by a cognitive bias, it can create an illusion which impedes arriving at a correct judgement. Another way of seeing it is that the perpetually active subconscious brain can systematically choose to use shortcuts to simplify a complex question into a simpler one thus avoiding the cognitive strain of engaging more intentional thought in coming to a judgement.
A relatable example of a cognitive bias is the confirmation bias where one looks for information that is in line with or confirms what we already believe e.g. when researching information to purchase something one already desires e.g. a new gadget or a stock exchange share and we only focus on positive information or reviews that confirm why one should buy it.
For this piece, the energy narrative will be based on two types of cognitive bias i.e. Focalism/Focusing Illusion and Group Think. The aim is to initiate discussion what these mean when assessing the future of energy and what can be done to mitigate their impact in our assessment process. Future pieces will refer to other biases as well as these are part of the everyday human mental wrestling occurring. This is particularly as we now take in more and more information and in real time – a phenomena the world has never experienced and takes us down novel and uncharted paths with every passing moment given approx 4.6 billion people plugged into the internet and rising.
Focalism /Focusing Illusion/ The Focusing Effect
This is the cognitive bias where the process of coming to a judgement focuses on a particular piece of information in a way that neglects other information that would also affect the outcome being assessed. From a pure perspective, this bias shows up in two main regular life aspects:
Affective forecasting i.e. Forecasting future emotions and how a future event, good or bad, would make one feel versus the reality of how one feels when such events indeed occur. For instance, when thinking how intense and lasting a positive feeling like winning the lottery would be, it tends to be over-estimated because the judgement ignores the context of what other worries and realities will be present at the time to offset this feeling e.g. family issues, health issues etc.
Social comparison i.e. When people compare themselves to another person and only focus on one aspect of the other person in concluding if that person is better or worse off than them e.g. focusing on their wealth, physical appearance etc.
One can take this framework and transpose it to how we assess the future of energy. The process of judging how the interactions shaping energy’s future will play out is riddled with complexity. This is from elements such as what technologies will succeed or fail, how will global economic and financial flows change, what will happen with regulations and what will happen with social and consumer behaviors.
The challenge this presents is that it becomes easier to focus on certain pieces of information in a way that makes us not consider other variables that are just as important. The complicated thing is that this bias (like many others) can be exhibited by the camps and subgroups of different sections of opinion.
Nuclear Energy example
For instance, nuclear energy is considered largely a minimal emissions energy generation technology since there are no associated greenhouse gas emissions that come with typical fossil fuel energy use i.e. burning a hydrocarbon like coal or oil to create energy to either turn electricity generating turbines or propel a car respectively. However, on the other end is that radioactive waste that requires meticulous disposal is generated. The typical radioactive waste of a 1GW reactor is estimated at 25-30 tonnes of used fuel per year. Moreover, history shows that a nuclear disaster though statistically unlikely, is devastating when it occurs e.g. Chernobyl or Fukushima. Other considerations, as shown by the EIA table to the left on cost characteristics of new electricity generation technologies , are how advanced nuclear energy has one of the largest upfront construction costs, operating & maintenance costs and longest construction lead times compared to other energy types even though fuel running costs are relatively low. This creates a climate that can easily focus on any one of these information areas in concluding the relative appropriateness of nuclear energy for a region i.e. emissions, cost, waste management or disaster aversion focus.
Group Think
This is the cognitive bias that develops when individuals forming part of a group cede their perspective/belief to the group in order to conform and ultimately derive consensus on a decision and action. This might be the case even if the individual themselves believes in a different perspective but sets that side in order to facilitate the groups decision.
Some January 2008 Financial Times article headlines
A prime example of group think at an underlying level is the Global Financial Crisis of 2007/08 which occurred due to, among other things, a collapse in the housing market with foundations constructed on subprime lending. Part of this bubble’s observed swelling can be attributed to the group think phenomena that gravitated all parties involved towards co-signing the outcomes, financial instruments and models based on this sub-prime rated housing market. This was from rating agencies, banks, citizens and governments. Ultimately, the danger of group think is that everyone in the group ends up being wrong and the consequences thus magnified. Another commonly cited historical example of group think driven calamity is the US’ failed invasion of Cuba in 1961’s infamous Bay of Pigs incident. The term group think itself was coined by Yale psychologist Irvin Janis in dissecting the reasons for this failed invasion of Cuba.
This group think phenomena will easily rear its decision-homogenizing head in many sectors of life, economics and industry. Assessing energy and its future is therefore no exception. If we look back to just the start of the decade and earlier, consensus leaned towards solar and wind energy for example not being technologically advanced enough or cheap enough to experience the growth to where we find them today.
Similarly, as at today, there is an attempt to establish consensus on the technologies that should be part of our future energy solutions e.g. electric and autonomous car proliferation, carbon capture and storage, electricity storage technology etc. The point is that as “collective” consensus develops in these areas, plausible alternative views are drowned in the sea of conformity. This does indeed allow consensus seeking groups such as firms, governments and even social clusters to move on with an “agreement”. However, group think’s pervasive tendencies have the potential to funnel challenging and complex decisions towards sub-optimal judgements.
Mitigating cognitive biases
The mitigations for these biases can be said to be routed in intellectual humility. This doesn’t make them any easier to avoid given human nature but identifying this offers a frontline self-check mechanism when evaluating where energy is going and what this means in terms of investment of time, funds & resources and associated legitimate trade-offs.
Sincere research is a catch-all term we can use here for the manner in which one approaches mitigating the biases. The word sincere here is key as it describes not only a level of diligence but importantly, an element of hanging the proverbial hat at the door and leaving preconceptions behind when engaging information one comes across. What this also entails is finding healthy ways of absorbing information that is contrary to what one might already believe and even formalizing “devil’s advocate” type roles in smaller groups. This is a way of approaching preconceptions similar to what Charles Darwin did in coming up with his Theory of Evolution i.e tasking himself with investigating reasons why the theory was wrong as opposed to why it was right.
This means securing trusted information sources but just as importantly, also engaging platforms that hold alternative views even though those could potentially be uncomfortable. A typical example would be to engage in understanding reasons why different groups hold different views on climate change, it’s source and therefore what should be done.
Another interesting and topical example today is the discussion surrounding the performance of Tesla’s share price (NASDAQ: TSLA) and market value which recently surpassed Toyota to become the most valuable car company by market capitalization in the early weeks of July 2020. Tesla represents an embodiment of what is anticipated for the future in terms of electric cars, battery technology and even space exploration. However some segments remain unconvinced as shown by about 10% of its shares being in the hands of short sellers i.e. market participants with positions on the share that anticipate shareprice drop in order to be profitable. Whether one believes in Tesla being fairly valued or not is not the issue of the example here but rather the concept of using the alternative perspective in helping inform ones own conclusions.
The insidiously troublesome property about our cognitive biases is that we can even know them and still exhibit them. That is the systematic mental impulse we have to deal with. There is no escaping nature’s way of infusing an underlying need for some sense of community and simultaneously the need to be on the right side of the future weather it be ideas, personal circumstances, feelings or presuppositions. As also noted before, these biases can provide benefits such as quick coordinating of groups (particularly large ones) to come to decisions and points of action. After all, usually a commitment to action is required and not all action paths can be taken equally. However, taking biases into account can allow for more balanced and diversified solutions that build in mitigations if things don’t work out as anticipated.
It also has to be said that we cannot be experts or deeply entrenched in every single topic, industry or trend. Biases therefore end up also serving the role of lightening the mental processing load on the human brain. However, in this exponentially increasing data and real-time information connected world, the importance of keeping bias in check almost becomes a prerogative if not a 21st century survival technique.
By Tare Kadzura ACMA, CGMA, EMME
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