Reprint: R1311E
Though a few superbright people may have the almost magical ability to consistently make good decisions, the rest of us just get by—or so conventional wisdom holds. But new research contradicts that thinking. A recent study by MIT’s Sandy Pentland and his colleagues shows that anyone can become a good decision maker. The key is to constantly conduct “social exploration,” or seek out a wide range of new people and ideas.
In 2011, Pentland’s team gathered data on 1.6 million users of eToro, an investment site that lets day traders see and copy one another’s moves. Information on the site is extremely transparent, so the researchers were able to plot the return each trader achieved against the amount of social exploration he or she did. The traders who had the right level of diversity of ideas and people in their networks experienced a return on investment that was 30% higher than the return of the isolated traders. They equally outperformed the traders who were too interconnected to one group and got trapped in an “echo chamber,” where similar ideas kept recirculating. What’s more, by offering incentives and nudges, the researchers were able to help more traders attain the model idea flow. The results? The profitability of all traders on eToro doubled.
Although these findings involve only stock investments, the researchers believe that many kinds of organizations can apply them to improve their internal decision making.
