Executive Analysis: When Is It Too Much?
When to Analyze and When to Rely on Instinct
A CFO with whom I worked was often challenging her team of accountants and financial analysts to know when enough analysis is enough. She knew that, by nature, her team was highly analytic and always looking to solve financial problems to the sixth decimal point. However, from her executive perch, she knew that it was more important to know what the financials were telling her than to have that level of perfection. She was always looking at how the business was trending and what important macro issues needed to be addressed. She challenged her team to avoid getting so deep into the trees that they could no longer see the forest! She wanted them to look for patterns.
Research on problem-solving has found that when addressing routine, familiar problems, more analysis does not yield a better answer. In such situations “trusting your instincts” is a more effective approach, and additional analysis can actually interfere with what you already know. Keep in mind that “instinct” is primarily pattern recognition. We all have millions of pieces of data stored in our minds from hundreds of thousands of experiences. When we “sense” something, it is because our minds are recognizing something in our past experience that is similar to, or even exactly like, the situation at hand. In Malcolm Gladwell’s book Blink, he calls such pattern recognition “thin slicing.” Research backs up Gladwell’s contention that in familiar situations we should trust our instincts.
When, then, should we seek more analysis to solve a problem? In fact, there are limits to trusting our instincts. Again, we turn to the research. When problems are unfamiliar, unique, cognitively complex, and, most importantly, critical to the business, we should perform analysis at a level adequate to validate or invalidate our underlying assumptions and be able to anticipate both the barriers to solving the problem and the effects of implementing a solution. In these cases, analysis should be more disciplined and thoughtful. Using our instincts in situations that are unfamiliar can result in solutions ranging from the hilarious to the disastrous. Regardless of the difficulty, uniqueness, or complexity of a problem, it is important to know when our analysis has reached the point of diminishing return—the point at which more analysis will not provide enough additional information to yield a significantly different result.
Before proceeding with a particular approach to problem-solving, consider these questions:
- Is the problem one that is familiar, routine, or over-learned? If so, limit your use of analysis and rely more on “instinct” in coming up with a solution.
- Is the problem unique, unfamiliar, cognitively complex, or critical to the business? In this case, analyze it using a disciplined approach of discovery, hypothesis testing, and understanding underlying assumptions to solve it.
- Do you have enough data? Recognize when you have reached the point of diminishing return, when new data will not yield a better solution. In other words, know when to stop!
By having a more disciplined approach to problem solving, you can become both a more effective and efficient executive. More importantly, you will be using skills commensurate to your position and making the greatest impact on your business.
