You’ve probably never hear of McArthur Wheeler, but you’ll never forget this story. Mr. Wheeler robbed a bank and was caught. The surveillance camera clearly showed him doing the deed, in fact he frequently glanced at the camera behind the teller. Mr. Wheeler was not brazen, rather he was mistaken in one thing. Someone told him that if he smeared lemon juice on his face the camera would blur his image. He believed them. This is an example of what people who study this type of thing call cognitive bias (false belief).
So enter Dunning and Kruger. In a study at an Ivy League school, they had students complete a test logical reasoning skills, grammatical skills, and humor. Then after being shown their test scores, the students were asked to estimate their own rank in the class. Interestingly, those students who scored very well slightly underestimated their rank. They assumed since it was easy for them it was easy for others. In other words, they assumed others were as competent as they were. Meanwhile, those scoring in the bottom quartile on tests overestimated their rank in the class. Dunning and Kruger in a follow up book called Why Incompetents Think They’re Awesome, concluded these people:
- Fail to recognize their own lack of skill
- Fail to recognize the extent of their inadequacy
- Fail to accurately gauge skill in others, and
- Recognize and acknowledge their lack of skill only after being exposed to formal training in that skill.
That might sound harsh, but how often have you seen this in business? If your answer is “a lot” then you’ve probably already identified the connection to FP&A. If there was ever a process where people would overestimate their skill, it’s Forecasting.
Forecasting Sales, for example, turns out not to be as easy as “take last year’s numbers and add 3%.” Forecasting Sales by month is even more challenging, as people familiar with Sales & Operational Planning (S&OP) will attest. That’s a fairly obvious example. Forecasting total compensation, sales commissions, inventory levels, benefits expense, T&E all present challenges.
A number of companies have turned to Driver Based forecasting; essentially putting forecasting in the hands of well-trained Finance professionals. That has seemed to help in some circumstances but it’s not perfect. Finance professionals are removed from the day-to-day front line action. As a result, trending models may not pick up on changes in the marketplace or operations that front line managers may be anticipating. So building relationships with non-finance managers still winds up being a factor in forecasting.
The “soft skills” related to building relationships; including verbal and written communication, presentation skills, conveying complex information in an understandable way, and other related skills can be a blind spot for finance professionals. Cognitive bias in these skills — assuming you’re as good or better than anyone else when in fact you’re in the bottom quartile — can be just as detrimental to FP&A as poor modeling skills.
Keep in mind one of the key observations of Dunning–Kruger, that low skilled people recognize and acknowledge their lack of skill only after being exposed to formal training in that skill. What do Finance people get plenty of training in? Analytical and accounting skills. Most have a related undergraduate degree in a related area. So this is less likely to be an area of cognitive bias — people will have a realistic assessment of their skill level. Where they are likely to have a blind spot is on their so-called soft skills. They are likely to continue to be blind to their shortcomings until, to quote the study, they are exposed to formal training in that skill.
The upshot? Addressing the Dunning–Kruger effect in FP&A may require not just a shift to driver based forecasting from a technical side, but also training in soft skills required to become a trusted business advisor.
Lawrence is a Principal of The Buttonwood Group and can be reached at [email protected]
To read the original Dunning-Kruger article that started it all (Unskilled and Unaware of It) follow the link below: