“The demand for certainty is one which is natural to man, but is nevertheless an intellectual vice.” – Bertrand Russell
Sustainability issues present multiple and often conflicting problems for firms and investors. Environmental, financial and social issues interact across different time horizons, geographies and logics and it is possible to interpret their significance in multiple different ways. It is increasingly accepted that managing successfully in this environment requires professionals to have a high degree of ambiguity tolerance. Indeed, ambiguity tolerance among business leaders has been correlated with positive outcomes including improved financial and market performance and an increased willingness to take risks, break with routines and devise innovative solutions by resisting the temptation to choose between the choices that are given to them.
Despite the widely appreciated benefits of ambiguity tolerance, empirical research suggests that in general, decision-makers are poor at remaining open to alternative interpretations of the same information. Sometimes, our attempt to resolve ambiguity is a conscious process. We intentionally close off our interpretation process by looking to convention, norms and standards to guide us to the right answer. In other instances, we may not even realize that we are trying to resolve ambiguity. We may unintentionally fixate on a particular interpretation, depending on our emotional state or the context in which the information is presented to us, and shut out other possible ways of seeing the same information.
Why do we seek certainty, even when we are aware that a belief in certainty is not good for us? Insights drawn from cognitive and brain science research often informs theories of how decision-makers process complex and ambiguous information.
Cognitive biases influence our decision-making in two ways. The first is by directly affecting the components that make up our decision-making frameworks, such as belief systems, values and judgment. The second is by affecting the inputs for decision-making; that is, by shaping our perception of external stimuli.
Perception is the process of identifying, organizing and interpreting sensory stimuli. Cognitive sciences explain how perception interacts with decision-making frameworks in complex ways. Insights from cognitive research are considered by conventional finance to be ‘soft science’ and reserved for those working on the margins of finance.
In contrast, conventional finance relies on brain sciences to form the core of its conception of human decision-making. While detailed expositions of neurological processes rarely appear in finance papers, the strictly physical system of processing information is almost always assumed. The brain receives signals from external sensory stimuli and assigns to them unambiguous meaning to inform the most appropriate or rational response. Beliefs are probabilities that are formed by observing frequencies of events. We can update our beliefs with new information (the facts) and we can enhance the confidence in our beliefs with repeated observations. Subjective and objective beliefs respond in the same way to new information. Individuals’ perception and emotion have no bearing on aggregate market outcomes.
A unique branch of cognitive and brain sciences study the way that humans process ambiguous information – that is, stimuli that induce multiple stable perceptions. The majority of this research focuses on visual stimuli. Most people will be familiar with the image below. Can you see the duck? Now what about the rabbit? Researchers have used these Gestalt images to understand what explains reversals in our perceptions of multi-stable sensory stimuli. That is, why do we switch between seeing the rabbit and the duck?
The predominant view in the literature suggests visual sensory functions, referred to as lower-level processes (physiological structures in the brain), are responsible for changes in our perception. The ability to perceive multiple interpretations of the same image is the result of a process referred to as reciprocal inhibition. This process works to suppress all but one of the interpretations of an ambiguous image. Over time, the brain grows physically tired of suppressing one version and the balance in the sensory network reverses to bring into cognition the alternative interpretation. This is described as a random process.
The interaction between cognitive and brain sciences offers a richer explanation for why decision-makers tend to fixate on one interpretation and deny the possibility of other equally valid interpretations. In particular, some researchers conclude that it is the interaction of our higher-level functions – those cognitive functions responsible for processes such as analytical thought, belief and planning – with the lower-level sensory (physical) processes that allow us to alternate between interpretations of the same sensory stimulus. Put another way, the sensory area of the brain is guided and influenced by higher-level cognitive functions. Moreover, the process of reorganization in the brain that is required to alternate between different perceptions of a stimulus is itself an expression of behaviour. In this way, perception is not an automated and random response to sensory stimulus but rather, an active response that can be conditioned and controlled, to some extent.
What researchers find that we are poor at doing is to combine the alternative perceptions into a single hybrid image. While we may be capable of perceiving both the rabbit and the duck, we cannot see both at the same time. Our brain has one conceptual frame for a duck and another frame for a rabbit. Similarly, when presented with binocular rivalry, where each eye is shown one of two mutually incompatible images such as a letter and a number, participants were found to fixate on one of the stimuli and eliminate the other completely from consciousness.
This tendency to fixate on one interpretation at a time has been explained by the idea that the brain works in categories, concepts and analogies, colloquially described as ‘chunks’ by cognitive scientists. These chunks allow us to perceive information in a way that constitutes a complex but coherent system. Once we build up complex concepts into simple unified wholes, we lose sight of their internal components. Scholars often use the example of Wikipedia. We can convey this complex concept in a single word without having to think about its constituent parts, such as encyclopedia, networks, peer editing, publishing and computers.
Because we think in conceptual chunks, cognitive scientists believe that changes in our perception occur as a unified shift from one global concept to another. For example, when shown a series of sketches that progressively change from a dog to a cat, researchers were able to identify the point at which most participants switched from claiming to see a dog to claiming to see a cat. Similarly, when we move to a low interest environment, the conceptual edifice shifts with it (e.g., inflation, increased investment). We economize on thinking by using conceptual chunks to stand for a whole range of complex and interdependent concepts.
This difficulty in perceiving multiple stable stimuli is particularly relevant for finance. In finance we are not dealing with the multi-stability perception problems of the duck-rabbit variety. Financial data are complex, with many different inflection points that could lead to a change in perception. The ability to continuously alternate between different interpretations of the same sensory stimulus is necessary to ensure we are adopting the most robust interpretation, within a given context.
To be sure, it is important that at some point we close off the interpretive process and act. This process of closing off allows us to respond to the situation. If we did not close off, it would be impossible to act. But the notion of a single ‘best’ interpretation in a complex and ambiguous decision environment is elusive. We must balance openness with the need to periodically close off the interpretation process in order to act, only to open back up again once decision is taken to alternative subsequent decisions.
While this is by no means a comprehensive review of the cognitive and neuroscience literature, the point is to highlight the scientific basis for explaining how perceptual changes occur when decision makers are presented with ambiguous stimuli. Perceptual change is increasingly understood to be the result of the interaction between cognitive and brain processes. The interaction between cognitive processes in the mind and the physical sensory processes in the brain is a promising area for new research in the decision sciences and its applications for complex sustainability problems.