It’s increasingly obvious that humans are emotional and irrational. So what does this mean for the hyper-rational, super-logical world of public sector financial management?
Could we be at a turning point in history? Progress over the past two or three centuries has largely depended on the idea that all questions can ultimately be solved through rational thought. Lately, however, key events and trends have started to change the way in which we see the world working.
Among these, the credit crunch has led to a plethora of books and articles pointing out that neo-classical economics – the notion that markets work near enough like clockwork if you leave them to get on with it – is only a very broad approximation of what actually happens. The field of behavioural economics (and the even more obscure science of economic psychology) has suddenly had a shot in the arm.
It's not that human beings are sometimes emotional and irrational; increasingly we are starting to see that as our natural state. Frankly, we are emotional and irrational most of the time and it is the bursts of rationality that are unusual.
The question is, what does this mean for the hyper-rational, super-logical world of public sector financial management and accountancy?
At one level, the answer has to be, 'not a lot'. After all, it is our job to present decision-makers with the facts as we understand them, and we are trained to not stray too far into opinion. Whether or not the costs of an enterprise add up to more than the amount of money available to fund it over time is a question that's susceptible to assumptions and professional judgment, but ultimately it is a problem that lends itself fairly comfortably to a rational solution.
If the finance director turns up at the board meeting and tells you that he feels it in his water that the budget is going to balance next year, then you might seriously consider whether he's the right person for the job.
On the other hand, it is our responsibility to help people make good decisions. To influence that process it is important for us to understand how those decisions are made and to adapt our methods accordingly. In case this frightens accountants into thinking that they've suddenly got to come over all 'touchy- feely', I hasten to add that there need be little or no actual bodily contact involved.
But I have found in my career that the best and most effective finance people are those who have an instinctive understanding that emotion plays a role in all aspects of everyday life, and who have natural empathy and rapport with people... and therefore with their clients. For those who don't have that happy knack, the skills can be learned.
Moreover, it is unarguably the case that traditional, rational methods of making financial decisions have not actually turned out to be all that helpful. As I write, the world economy is consuming natural resources at a rate that will eventually use up 1.3 planets, while the US economy on its own is currently munching its way gradually through ten planets.
You don't have to be much of an environmentalist to realise that this leads us to the kind of future we don’t want to contemplate, and it certainly is not rational. While this is perhaps the biggest example of non-sustainable policy-making, and one for which public sector accountants in the UK probably don’t need to take too much personal blame, there are other smaller but significant ones closer to home for which we may be more directly culpable. Unfunded public sector pension schemes is one example.
Recent human history has been based on the Micawberish principle that something will always turn up that will save the day, either in the form of sustained economic growth or scientific innovation. It has worked so far, but can we afford to keep taking the chance?
Finance professionals need to be open to the idea that sometimes things are more complicated than the old ways of working the numbers reveal, and to see if we can come up with better ways of helping people to make best use of resources. One area for consideration is our tendency to map financial outcomes over relatively short timescales, matched to the timescales with which decision makers are able to grapple, and often, let it be said, bearing an uncannily close correlation to the electoral cycle.
In recognising that major decisions have more than a sprinkling of emotion about them, we also need to be wary. Is our increasing acceptance of the instinctive side of decision making a reaction to the fact that solving some problems rationally often seems too hard? The suggestion that governments should sometimes just try things to see what happens might work in certain circumstances, but we would not necessarily want it to become the norm.
It is important that professionals like accountants, but also scientists, doctors and lawyers, should keep their wits about them and not pander too much to ‘suck it and see’.
But having said that, we don't want to be burying our heads in the sand. The myth of 'rational man' has led us to assume that all choices are rational and in the process has produced some unhappy outcomes. Accountants need to be aware of that.
It is our job to provide the data, but not then just to walk away and let human nature take its course. Our role is not just to support decision making, but to support the decision-maker too. That is one of the reasons why business partnering – the working relationship that is built up between a professional specialist and their client – is so important.
If we know our guy makes decisions using his gut, then we can support him better to the right decisions by working with him on that. If we assume he uses his head when he doesn’t, we are not likely to put him in a position where he can take the best course.
Alan Finch is head of finance at the London Borough of Tower Hamlets
