Finance managers must be aware of the dangers of self-justification and pre-determination in decision-making. Fortunately, there are tools and techniques to help arrive at more objective outcomes
When I first started my accountancy studies – in fact on the very first day – the lecturer asked the class a question. ‘As an accountant, when you are asked to find the answer to a problem, what question should you ask your client?’ The correct answer, we were told, was ‘What answer would you like?’
This perhaps unnecessarily cynical advice was intended to demonstrate that financial management can be as much an art as a science. There are rarely clear right or wrong answers to any complex question, even when numbers are involved. The future can only be predicted by making assumptions, and assumptions, as we all know, are flexible.
Nevertheless, surely finance professionals can be confident that so long as they put the right information in front of decision-makers, they can steer them to appropriate conclusions? Unfortunately, the answer is no. It isn’t that simple.
In the 1990s, an experiment was conducted at the University of Kansas that demonstrated how easily people fool themselves in order to arrive at the ‘right’ answer to a question. Subjects were told that they would be competing with someone in another room to answer a quiz, and would have to decide randomly which of them – depending on the outcome – would be eligible for a prize. They were each given a coin to help make the decision, and then left unsupervised.
The result, which may surprise some more than others, is that 90% of people decided in favour of themselves. Half didn’t even use the coin to make the decision, and even when they did, it made no difference. Thinking that their subjects might be having trouble distinguishing between heads and tails, the experimenters tried labelling the coins, but again it made no difference.
What this demonstrates is a phenomenon that most of us will recognise; it’s easy to find a justification for the outcome you desire, even if you know it’s not right. In the light of this, it’s not a mystery how so many disastrous decisions get taken that put the world’s finances into such disarray. It is not a simple question of laziness or incompetence; deep down everyone is looking for ways of justifying the decision we most want.
In the US in the 1990s politicians badly wanted to encourage working-class people to own their own homes, people badly wanted to own them, and banks badly wanted to boost their business. The result was the issuing of loans to people on terms they would almost certainly not be able to afford. It doesn’t need the wisdom of hindsight to recognise that this was a ludicrously bad idea. It was put into action because a decision not to do it would have been too hard.
In the case of the Kansas experiment, even an unbiased and independent adviser (a ‘coin’) was unable to prevent a badly skewed outcome. If making a simple choice like this is easy to ‘fix’, then how much easier is it when the issue is a complex one involving lots of assumptions?
It is hard to give impartial advice when the decision-makers have already committed themselves in a manifesto to a particular outcome. After all, it is not the job of finance professionals to go against the democratic process – and they may be as susceptible to opting for the ‘right’ outcome as anyone else.
Fortunately, there are tools and techniques to help arrive at a more objective conclusion. Governance – that is, having a set of rules and procedures for decision-making – plus scrutiny and transparency, are just three that spring to mind.
Returning to Kansas, psychologists found there were only two ways in which they could affect the outcome. One was to stress the importance of fairness to the subjects at the start of the experiment. Having done this, they found that it helped to put a mirror in front of the subject, so that if they were inclined to cheat they would be forced to look at themselves doing it. It is almost certainly the case that having someone in the room with them when they made the decision would have improved the fairness of the outcome as well.
For professional advisers it is important to realise that self-justification and pre-determination of outcomes are risks. Financial advisers need to guard their professional integrity carefully, but they also know that getting the best decision is often a matter of compromise.
This means building relationships, empathy and trust over a long period, so that when the unwelcome advice does need to be given, they are more likely to be listened to.
Alan Finch is senior financial analyst at the London Borough of Tower Hamlets
