Research

Nobel Laureate Kahneman Suggests Using Percentiles to Quantify Judgments about Investment Drivers like Competitive Advantage

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How should strategic decision makers express their assessments? Standard rating scales with verbal anchors (“very good,” “good,” and so on) have the advantage of simplicity. However, the ambiguity of verbal labels is a major source of noise, because different people use different words to convey the same underlying judgment. Percentile scales offer a possible solution. Many leading companies already use them to express judgments about the performance of employees on multiple dimensions. For example: “Jenny is in the top 10% of the population of junior executives for raw intellect, but in the third quartile for interpersonal skills.” We recommend extending the use of percentile scales to assessments in other domains. When evaluating the quality of a target company’s go-to-market capabilities, for instance, a venture capital firm can ask: “How does this company compare with other companies in the same sector? Is it in the top 10%? In the top 25%?”