Photo: jecate (Flickr)
Although there are some things that each financial crisis has in common (e.g. a bubble in a commodity that bursts spreading problems across the whole economy), each crisis also has its new elements.
Jerry Muller, writing in The American, says that what's new about this particular crisis is the role of "opacity" and "pseudo-objectivity." By opacity, he's referring to the complexity of financial instruments designed to reduce risk but which, instead: "created a fog so thick that even its captains could not navigate it."
By pseudo-objectivity, he means the search for standardized measures of achievement as a way to supervise and coordinate activity across large and disparate organizations. His thoughts on this fit with the themes I've explored in earlier Death By Tools and Metrics posts (see below).
Here's how he starts his critique on this "cult of accountability": "Its implicit premises were these: that information which is numerically measurable is the only sort of knowledge necessary; that numerical data can substitute for other forms of inquiry; and that numerical acumen can substitute for practical knowledge about the underlying assets and services."
He continues: "Attaching a number creates a belief that the information is more solid than is actually the case..... In each case, it is a response to what (to recoin a phrase) one might call alienation from the means of production, the attempt to substitute abstract and quantitative knowledge for concrete and qualitative knowledge."
He gives, as an example, pay for performance compensation. This, he says, creates tremendous incentives for executives and traders: "to devote their creative energies to gaming the metrics, i.e. into coming up with schemes that purported to demonstrate productivity or profit by massaging the data, or by underinvesting in maintenance and human capital formation to boost quarterly earnings or their equivalents."
As I said in an earlier post in this series, there is an inherent "risk of relying and focusing on things that can be measured rather than things that matter." And focusing on the wrong signals in a thick fog, well that's a recipe for disaster.
Earlier posts in the Death by Tools and Metrics series:
1) Discounted cash flow
2) The P&L
3) Same store sales
5) Treating the numbers
Monday, February 2, 2009
Photo: jecate (Flickr)