Powerful and reckless

Whether it’s a farm shop owner deciding to diversify from ice creams into frozen yoghurts, or a government minister backing a multi-billion pound transport link, the initial decision to go ahead is filled with risk. We do not know what will happen if we go ahead and we do not have control of the outcomes.

Sometimes the outcomes will be pleasantly surprising, and other times just as we thought most likely. But many other occasions they are disappointing. With transport infrastructure projects, for example, research shows that disappointment is the most likely outcome. Historically, the gap between expectation and reality has varied by type of project and the same can be said for other business initiatives, but still disappointment remains the norm.

Typically people underestimate costs and overestimate benefits. For example, Eurotunnel cost 80% more than expected while traffic in the first year was only 18% of that predicted. So, why is this?

Even in the simplest, least-pressured situations, we tend to make estimates that are biased in two ways. First, they are biased towards the direction that supporters of a potential project like – typically towards lower costs and higher benefits. Second, people are too confident that the estimates on which a project is based are accurate.

Most people seem to be aware of the first bias and tend to adjust expectations to some extent when someone makes claims about a favoured initiative.

But the second bias is less obvious, and can be more dangerous as a result. Being aware of the uncertainty around outcomes is what drives us to manage risk. Without that awareness, some key best practices might seem to be pointless.

These estimation biases appear even when we are under no pressure from others to proceed with a project, but just want to make the best estimates we can.

In organisations we can rarely escape pressure from others. If we think doing something is a good idea, but will need to work to get others to agree, we tend to become advocates for our idea. We stop trying to produce the most objective analysis and instead focus on producing the most convincing arguments.

We begin to select the benefits we think will be most persuasive and avoid drawing attention to potential problems. We choose facts to suit our case. Instead of offering objective estimates we move towards offering those that look positive and certain enough to get backing, but without creating unnecessarily high expectations.

Left to our own devices, we might plan the initiative in cautious steps and keep options open, but precautions signal doubt to others. So, in advocacy mode, we avoid them. Ironically, this desire to present an attractive plan can lead us to offer one that is needlessly risky.

This dangerous advocacy can lead to projects going ahead that should have been killed off, but there is a limit. Not everyone is deceived, some people object so strongly that advocacy is not enough to win the day, or perhaps there are other priorities that want to make a claim on the available resources.

To kick off a really big, really bad idea usually requires power. This power overcomes objections, commands vast resources and makes grand commitments.

A person with power who wants an initiative to go ahead despite opposition has options the rest of us do not have. He or she may be able to decide the matter without agreement from others, but failing that he or she has a variety of tactics that go beyond the usual advocacy:

• controlling who speaks;
• blocking some documents and circulating or publishing others;
• removing people who might be unsupportive and appointing those seen as supporters;
• engineering formal commitments to such as public announcements and votes;
• and creating explicit incentives and disincentives, perhaps using targets and bonuses, to steer large numbers of people in a desired direction eg aggressive expansion.

Robert Pasescu, senior risk reporting analyst at JP Morgan, while a student at the University of Southampton, studied the cases of HBOS, AIG, Citibank, and Lehman Brothers in the run up to the financial crisis of 2008 and found evidence that tactics such as these were used to promote risky strategies.

Even when a powerful person does not explicitly make his or her wishes clear, and does not openly promise rewards or threaten punishments, others will at times unconsciously anticipate the leader’s wishes and try to support them.

Few examples of advocacy in favour of an opposed idea have been questioned as closely as the dossier produced for prime minister Tony Blair in 2002 to justify war against Saddam Hussein. The Iraq Inquiry’s report, led by Sir John Chilcott and finally published in July of this year, concluded that the dossier presented a picture that was at or beyond the limit of what could be justified by the intelligence available at the time.

The details of this are explained in the report’s 12 volumes, but the gist is that although the prime minister did not ask for specific lies to be told, he did ask for the strongest case to be made consistent with the facts and those around him seems to have accepted that stronger was better, provided it could be justified in some way.

The most worrying intelligence available at the time came from a new source whose reliability was still to be assessed but who, apparently, could provide details on a computer disk of weapons of mass destruction in Iraq.

On the day the dossier was published, the source provided more details, describing chemical weapons in “linked hollow glass spheres”.

This is obviously not the usual way of storing dangerous chemicals, but such spheres were used for dramatic effect in the 1996 film The Rock starring Sean Connery and Nicolas Cage.

The most common situation for a finance professional caught up in one of these battles is that of advising on the potential financial consequences of a proposal. The pressure can be intense, because the advocate wants attractive numbers and no expressions of uncertainty.

The ICAEW Code of Ethics is clear – pressure, even implicit, is to be reduced to an acceptable level or the professional accountant must refuse to be associated with the information; the information provided by the professional accountant shall be fair and honest; and finally, it is wrong to mislead even by being silent.

The Code is also explicit about information that is biased or misleading, but does not explicitly talk about presenting information as more certain than it really is. However, the Iraq Inquiry example shows that false certainty can be very misleading.

The Code is clear, but what makes things less clear is that the pressure on a accountant may be subtle. A number of different cost estimates may be at least justifiable, your caveats may not be very clear and you may feel that a bit of selling is necessary to get the appropriate support for a great initiative. Maybe you are the one who is biased?

What can the professional accountant do to manage his or her personal risk in situations like this? No one solution exists but here are some suggestions:

• If you can, make the first, tentative predictions of costs and benefits as early as possible – while the idea for the initiative is still taking shape – and clearly state any uncertainties involved. People with power may be more receptive before advocacy takes over.
• Suggest more robust plans and justify them managing risk and making the proposal more attractive. Again, do this early on. This directly tackles one of the potential problems with advocacy, which is the irrational rejection of cautious plans.
• Make your first draft as objective and as open about uncertainty as possible, then watch the reactions of senior colleagues to see if you are pressured to revise your predictions. This at least will clarify the situation for you.

Reckless initiatives are sometimes justified by biased, overly confident predictions of results and other advocacy, and pushed through by people with power. In the heat of the moment, it can be hard to know when this is happening.

We only know that most projects turn out worse than expected because we have hundreds of past projects to review. During any one project, how is someone to know if the usual bias is operating or if the project is one of the exceptions? The tendency to be overconfident in judgements is unconscious. Even if you know it happens you still can not always feel it or prevent it at the time.

If your boss rejects your honest estimate and threatens to get someone else if you do not change your stance, is it possible you have misunderstood the plan and failed to realise the true situation? Could it be in fact that you standing in the way of a great initiative? There is no obvious way to tell, but if you select your forecasting methods to limit the scope for bias and look carefully at the details of arguments on both sides, you may be able to itemise factual and reasoning errors that show a pattern of dangerous bias.

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• Powerful and reckless
  Business & Management Magazine, Issue 247, October 2016

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