Analysis vs Emotion - How to make correct decisions
Updated: Jun 19, 2019
Whether a large multinational, a startup or for making every day decisions, analysts often miss real factors in their assessment.
But if the common guide is wrong, how can one consult with analysis and understanding?
What I know is that there is a balance of 3 things to coming up with the right decision.
Real Business Understanding (Business Acumen).
Emotion (of Executives & the Market).
Early in my career I operated mainly as a Business Analyst – under CFOs and finance areas.
You are coached under numbers. Numbers have to make sense.
Stage 1 is to understand how to do complex spreadsheets & models to create numbers. This is the challenge of ‘skill’ with numbers. A lot of accountants want to become analysts and so develop this trendy skill. An analyst often moves up based on this ‘technical’ skill.
But not being an accountant I had the benefit of dealing with the business. All levels, all departments.
This gave me a good view of real numbers and how to model effectively. Across more than a dozen industries to learn quickly how to adapt and what is really happening in that organisation – better than the executive. Otherwise how can you advise them?
Stage 2 is to have internalised a good model of the business and real world – to call upon intuitively to create the numbers (in spreadsheets or otherwise) to show the living representative or model that as an analyst – you have the technical skill to produce.
This is 80% of the circumstances. But interesting, I believe this is only 50% of the right decision.
The final decision comes down to emotion.
This could be deemed in many ways a curse word. Surely as Financial Gatekeepers or Chiefs, Senior Financial Gurus and Expert Consultants – the job to keep emotion out of it and to let the real world in.
But I can count many times where I have given the ‘analytical’ advice not to proceed – have it proceed anyway and been wrong.
Note, it is not necessarily the analysis or numbers that were wrong. But somehow it was made to work.
In fact I can recall times where my numbers in fact were even optimistic to what eventually happened in some areas – costs of integration were higher. Time delays postponed benefits. And the factors that made it work were in fact – for want of a better word – a ‘fluke’.
But at the end of the day – it was better to proceed than not to proceed.
The executives, the CEO or the Board wanted to go ahead. It was in the mind – or vision that this should happen despite unexpected numbers.
Decisions were emotionally, some might argue irrationally driven.
And so despite seemingly better judgement – it did proceed.
Of course, there are times when the analysis was correct. It was a dumb idea. I have found often when someone big acquires someone small for example – paying above market multiplier (valuations on business are often based upon multiplier of annual profits) – the short term benefits of share price or profitability are undone quickly by a complete botch large companies often make of integration.
Destruction of brand, operations and human capital – which was the true value of the smaller business – ensues.
But these can be understood as well. What emotion is driving that? It is usually the desire to make the value ‘look good’. Of pure short term profitability. Actually a quite weak emotional drive. Quickly forgotten once the deed is done.
A vision of the future however, that is different.
Things can often move and a long term view – often unpredictable or in fact – created by the transaction starts to dictate value.
And one cannot easily or credibly model this.
It is like finding the butterfly that flapped its wings to change the world was not just any butterfly. And there is no way you can predict the forces created by that butterfly.
The point is – Emotion is a business force. A factor. Something to include in one’s analysis without any easy way to do it.
One should present the numbers. One should not get too carried away themselves by the vision and emotion of the market or executives in producing these numbers – it is way too easy to do so and colour your analysis wrongly.
But with any analysis, one needs to understand those forces. Even predict it. It will be learned just as business acumen is learned through that oft forgotten skill from people starring at too many numbers – communication.
Once your case is presented as clearly as possible, believe in them. But don’t also not believe the force of emotion and drive of a person, a team, an organisation or a market cannot force those numbers in another way.
And once the decision is made, you can only countenance it. Lest you colour that emotional force for success with your own doubts and justifications to be right.