Numbers Don’t Lie — Or Do They?

19 March 2008 at 9:44 pm 1 comment

| Peter Klein |

Quantitative analysis leads to superior decision making, says Ian Ayres in Supercrunchers. Enthusiasts for expert systems are skeptical of “intuitive” reasoning. And most contemporary social scientists can’t conceive of a world without econometrics, sociometrics, psychometrics, and fill-in-the-blank-ometrics. Even management scholars are getting into the act. Of course, quantitative analysis is only as good as the assumptions that go into it. And economists such as Knight and Mises maintain that some kinds of human decision-making defy quantification and systematization and are fundamentally qualitative, or verstehende (explaining why some entrepreneurs earn profits while others make losses).

Wharton’s Gavin Cassar studies nascent entrepreneurs (defined here as firm founders) and finds, surprisingly, that those who use common accounting practices such as budgeting, sales forecasting, and financial planning are more likely to overestimate future performance than those who rely on qualitative, intuitive projections. “[T]hose individuals who adopt an inside view to forecasting, through the use of plans and financial projections, will exhibit greater ex-ante bias in their expectations. Consistent with inside view adoption causing over-optimism in expectations, I find that the preparation of projected financial statements results in more overly-optimistic venture sale forecasts.” In other words, quantitative analysis may exacerbate, rather than mitigate, cognitive bias. Worth a read (and see this summary in Knowledge@Wharton).

Entry filed under: - Klein -, Entrepreneurship, Methods/Methodology/Theory of Science.

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1 Comment Add your own

  • 1. Bart  |  21 March 2008 at 3:21 am

    In a recent quick-scan of big bank blunders by securities watchdogs following the credit crisis I find an interesting case to supoprt this too. The report basically states that banks that took a common sense approach to the employment of formal risk models, by regularly updating them to changing circumstances and by using “critical judgment” to employing model outcomes for decision making, actually performed better as opposed to banks that dominantly based decision making on their models. Somehow this made me think of the application of superior judgment resulting in superior performance. Judgment is even used as a word in the report! Quite the entrepreneurial act in an uncertain circumstance, it would seem, though not so directly tied up with asset ownership. Although… you could consider senior bank members’ reputation as an asset in judgment calls under these circumstances
    What do we make of that?

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