Sudden Social Shifts and Strategic Risk
03/Dec/17 11:32
The economist Rudiger Dornbusch famously noted that, “crises take a much longer time coming than you think, and then happen much faster than you would have thought.”
Today’s hyperconnected world provides ample evidence of the truth of his insight. The more connected we become, the more the potential exists for rapid shifts in opinion and behavior that create new strategic risks for many organizations.
In order to better anticipate these sudden and substantial shifts, directors and executives should keep in mind the underlying processes that are at work. This note provides a brief overview of four of the most important. In practice, these often operate together, with positive (amplifying) feedback loops between them.
Our starting point is Daniel Kahneman’s distinction (made in his book, “Thinking Fast and Slow”) between two modes of thought.
“System 1” is rapid, instinctive, based on association, and generally unconscious. It generates fast conclusions and emotions that prime us for actions (e.g., fight or flight) that, from an evolutionary perspective, have been highly adaptive for the survival and success of the human species.
In contrast, “System 2” thinking is slower, deliberate, logical, and conscious. Because it is also more effortful, most human cognition is based on System 1, not System 2.
Drivers of rapid shifts in popular perception, opinion, and behavior are found in both System 1 and System 2.
In the case of the former, the most primal driver is our capacity to rapidly transmit fear, through a variety of non-verbal means, including facial expressions and odor.
A more evolved System 1 response is an automatic increase in our desire to avoid disagreement or abandonment by a group when perceived uncertainty or adversity increases. This is the neurobiological root cause of the conformity and groupthink that can produce substantial shifts in opinion and behavior.
System 2 processes can produce so called “cascades” and “herding” when we can observe previous decisions made by other people.
Research has found that so-called “loss aversion” is a normal human response when the result of a decision will remain private. However, when it will be visible to others gains become more important. This tendency is further reinforced by other research, which has found that copying others – so called “social learning” – is increasingly effective as the decision environment becomes more complex.
These drivers underlie other research, which finds that a relatively small fraction of committed agents in a population (about 10% or more) can produce and sustain a significant opinion shift.
Broadly speaking, decisions made by System 2 are based on three types of input: private information not available to everyone, public information, and social information. In cascades and herding, people will often disregard private information that is inconsistent with social signals. However, rapid changes in public perception and behavior can also be triggered by the appearance of a new public signal.
As described in the work of a number of researchers (e.g., David Tuckett, Robert Shiller, Paul Ormerod, and Marvin Cohen), in the face of high complexity and uncertainty, humans decide and act not on the basis of detailed quantitative analyses (which are impractical and often impossible), but rather based on so-called “conviction narratives” or, more simply, the stories we tell ourselves and others.
These narratives are based on our private, public, and social information, along with logic and assumptions. They produce varying levels of certainty (or “conviction”) about the accuracy of our perceptions, appropriateness of our proposed actions, and the likelihood they will achieve our goals in a given situation.
From the sum of individual conviction narratives and the strength with which they are held there emerges the phenomenon Keynes called “animal spirits," or what we more generally call the level of public confidence in a given situation.
In many cases, people will have varying degrees of conviction about the accuracy and importance of the private information they possess, and, as we have noted, will often weigh social information more heavily when constructing narratives that explain the past and forecast the future.
However, a surprising new public signal – say, the announcement that a high ranking government official has been indicted for a crime, or that a key party is abandoning a coalition government – can quickly and dramatically change these narratives, and thus public perceptions, confidence, and behavior.
So, to sum up: Increasing uncertainty or adversity causes System 1 to prime us to conform to the views of the group, however they may change. And that reaction goes into overdrive when uncertainty and adversity crystallize into threats, danger, and fear.
Thus primed, the interactions of System 1 with System 2 can produce dramatic shifts in public perceptions and behavior due to changes in social information (often originated by a relatively small number of people and rapidly amplified in our hyperconnected world) and/or by the appearance of a surprising public signal.
Today’s hyperconnected world provides ample evidence of the truth of his insight. The more connected we become, the more the potential exists for rapid shifts in opinion and behavior that create new strategic risks for many organizations.
In order to better anticipate these sudden and substantial shifts, directors and executives should keep in mind the underlying processes that are at work. This note provides a brief overview of four of the most important. In practice, these often operate together, with positive (amplifying) feedback loops between them.
Our starting point is Daniel Kahneman’s distinction (made in his book, “Thinking Fast and Slow”) between two modes of thought.
“System 1” is rapid, instinctive, based on association, and generally unconscious. It generates fast conclusions and emotions that prime us for actions (e.g., fight or flight) that, from an evolutionary perspective, have been highly adaptive for the survival and success of the human species.
In contrast, “System 2” thinking is slower, deliberate, logical, and conscious. Because it is also more effortful, most human cognition is based on System 1, not System 2.
Drivers of rapid shifts in popular perception, opinion, and behavior are found in both System 1 and System 2.
In the case of the former, the most primal driver is our capacity to rapidly transmit fear, through a variety of non-verbal means, including facial expressions and odor.
A more evolved System 1 response is an automatic increase in our desire to avoid disagreement or abandonment by a group when perceived uncertainty or adversity increases. This is the neurobiological root cause of the conformity and groupthink that can produce substantial shifts in opinion and behavior.
System 2 processes can produce so called “cascades” and “herding” when we can observe previous decisions made by other people.
Research has found that so-called “loss aversion” is a normal human response when the result of a decision will remain private. However, when it will be visible to others gains become more important. This tendency is further reinforced by other research, which has found that copying others – so called “social learning” – is increasingly effective as the decision environment becomes more complex.
These drivers underlie other research, which finds that a relatively small fraction of committed agents in a population (about 10% or more) can produce and sustain a significant opinion shift.
Broadly speaking, decisions made by System 2 are based on three types of input: private information not available to everyone, public information, and social information. In cascades and herding, people will often disregard private information that is inconsistent with social signals. However, rapid changes in public perception and behavior can also be triggered by the appearance of a new public signal.
As described in the work of a number of researchers (e.g., David Tuckett, Robert Shiller, Paul Ormerod, and Marvin Cohen), in the face of high complexity and uncertainty, humans decide and act not on the basis of detailed quantitative analyses (which are impractical and often impossible), but rather based on so-called “conviction narratives” or, more simply, the stories we tell ourselves and others.
These narratives are based on our private, public, and social information, along with logic and assumptions. They produce varying levels of certainty (or “conviction”) about the accuracy of our perceptions, appropriateness of our proposed actions, and the likelihood they will achieve our goals in a given situation.
From the sum of individual conviction narratives and the strength with which they are held there emerges the phenomenon Keynes called “animal spirits," or what we more generally call the level of public confidence in a given situation.
In many cases, people will have varying degrees of conviction about the accuracy and importance of the private information they possess, and, as we have noted, will often weigh social information more heavily when constructing narratives that explain the past and forecast the future.
However, a surprising new public signal – say, the announcement that a high ranking government official has been indicted for a crime, or that a key party is abandoning a coalition government – can quickly and dramatically change these narratives, and thus public perceptions, confidence, and behavior.
So, to sum up: Increasing uncertainty or adversity causes System 1 to prime us to conform to the views of the group, however they may change. And that reaction goes into overdrive when uncertainty and adversity crystallize into threats, danger, and fear.
Thus primed, the interactions of System 1 with System 2 can produce dramatic shifts in public perceptions and behavior due to changes in social information (often originated by a relatively small number of people and rapidly amplified in our hyperconnected world) and/or by the appearance of a surprising public signal.
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