Value of Categorization

The human mind is a categorization machine constantly taking in volumes of data and immediately developing thoughts and opinions to understand the environment. A recent article in the Harvard Business Review suggests that categorical thinking is a silo-styled mindset and one that can greatly hinder the thoughts we develop. However, there is value to categorization. The authors believe two things must be true for value to be developed; it must be valid and useful. Businesses tend to create and depend upon invalid or not useful categories and this can lead to critical errors.

Dangers of Categorical Thinking

The danger of categorical thinking starts with its ability to create powerful illusions. We, as a society, tend to jump to conclusions when we see it categorized within a specific group and believe that to be correct. The authors suggest that The Myers Briggs test is a perfect example of this; the test requires participants to answer 93 questions with only 2 possible answer choices and compiles their answers into a single personality category from a total of 16 various types. The authors organize the dangers of categorical thinking in the following way:

  1. Compression
    1. Target Market – Studies have been conducted to show that segmentation and target market surveys do not accurately depict the market. Marketers see similarities and begin to dream up the prototypical customer and fail to acknowledge that variations still exist within categories. The authors propose a key question for analysts and managers to help reduce the effects of rushing to this conclusion: How likely is it that two customers from different clusters are more similar than two customers from the same cluster?
    2. Financial Markets – The authors use as an example the internet bubble of the late 1990s, to show how people will allocate capital inefficiently in terms of risk and return to follow the “social norm,” even when nothing changed about the business.
  2. Amplification
    1. Group Dynamics – The authors discuss how people affiliated with opposing political parties tend to overestimate the extremity of each other’s views. The reality is similar to the study for the target market and that variations exist within the ideology and policy positions of each party and the similarities between people in separate parties can be closer to 50% than 0%.
    2. Customer Profiling – The authors highlight this subsection of Amplification due to today’s age of big data. Companies, such as Facebook, assign categories to people based on search data and associate related ads to that individual. This was a big issue with the 2016 election as companies took the data from Facebook and falsely understood the gap between the parties and began to deliver highly tailored messages to each group.
  3. Discrimination
    1. Over Targeting – This study showed that it is actually better to target the general population than a specific target market with Facebook ads. The difference in success was found to be only .03% greater with the target at a much higher cost. Marketers get obsessed with target markets and ignore the value of marketing to the general population and expanding the reach of their ad campaigns.
    2. Biased Interpretation of Correlations – The authors use an example of a scatter plot and show how we associate correlation to positive results instead of negative results. They claim that failing to attend equally to all categories harms your ability to accurately uncover relationships between variables.
  4. Fossilization
    1. Innovation – Innovation is about breaking the categorical thinking barriers and using cross-discipline objectives for business departments. The authors discuss how future business problems will not fall under one specific business silo and will instead need to utilize the unique skills across multiple departments to solve the problems at hand.

Strategies to Limit the Dangers of Categorical Thinking

The authors have created the following four-step process to help a thoughtful leader avoid the harm and dangers of categorical thinking:

  1. Increase Awareness
  2. Develop Capabilities to Analyze Data Continuously
  3. Audit Decision Criteria
  4. Schedule Regular “Defossilization” Meetings

Summary

The human mind utilizes categories to quickly acknowledge and decipher information and communicate back with the world. The issues that come from a mindset of categorical thinking is that we can get too comfortable with our thinking style and begin to see categories where none exist. The purpose of this study was to develop strategies to combat the dangers of categorical thinking as the data revolution progresses and our world becomes even quicker and more adapted to the data revolution. Our future will hinge upon our ability to adjust our thinking style and learn to mitigate the consequences of categorical thinking and continue to innovate the way we process, analyze, and communicate our thoughts and opinions.

Link: Harvard Business Review "The Dangers of Categorical Thinking"

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ERM Enterprise Risk Management Initiative 2020-01-24