Death by tools and metrics #5: Treating the numbers ~ Brand Mix

Friday, March 21, 2008

Death by tools and metrics #5: Treating the numbers

This is the fifth in a series of posts about the dangers of blind allegiance to tools and metrics. Today's subject: Treating the numbers.

Two examples of this. The first comes from an article published in Knowledge@Wharton about the work of Gavin Cassar, an accounting professor. He's shown that using accounting tools designed to help bring some discipline to the management process actually can make things worse.

As he says: "It's been shown in many studies that people are overly optimistic. What's interesting here is that when you use the accounting tools, the optimism is even more extreme." Using these tools actually leads to bigger mistakes.

One area that Gavin has researched is financial projection preparation for entrepreneurial ventures where he showed that people who did these projections were the most likely to overestimate future sales. Financial projections seem to subvert the thinking of entrepreneurs. I know, from my own experience, how easy it is to make the numbers work by tweaking assumptions and, once the numbers start telling the story you want to believe, they become powerful reinforcers.

The second example comes from the medical field. As reported on NPR, doctors rely on proxy metrics to see if a drug is working - "treating the numbers," they call it. For example, the reason diabetic patients take Avandia is to reduce their chance of getting a heart attack or stroke. But doctors measure its impact on blood sugar levels assuming this is important and because this is something they can track. Unfortunately, recent studies have shown that people taking Avandia actually had more heart attacks and strokes. Same with Vytorin. It does a good job of lowering cholesterol levels but patients taking it didn't have any less plaque build-up than patients taking less potent drugs.

Both of these medical cases show the danger of treating patients on the basis of unproven assumptions. They also, together with the accounting example, show the risk of relying and focusing on things that can be measured rather than things that matter.

Earlier "Death by Metric " posts:
1) Discounted cash flow
2) The P&L
3) Same store sales
4) ROI

1) Biased Expectations: Can Accounting Tools Lead to, Rather than Prevent Executive Mistakes?: Knowledge@Wharton
2) Doctors 'Treat the Numbers' Approach Challenged: NPR

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