Spreadsheet Use & Human Bias: Why Both Are Putting Your Company At Financial Risk

Spreadsheet use is universal. And using spreadsheets for complex reporting has proven time and again to be killing people’s time, reducing their ability to make good decisions, and putting companies’ financial positions at risk. Because the ugly truth about spreadsheet use has been known for some time, it’s fair (and right) to ask then, why are companies still ignoring the consequences of using spreadsheets in ways for which they weren’t designed? Why the persistent resistance to changing their financial reporting process and the tools in which they’re completed? And how do the majority of organizations maintain confidence in a process that’s been proven for decades to be flawed and potentially dangerous?

Statistics on spreadsheet based reporting

Overconfidence Human Bias

Well…one reason is the now well-demonstrated human bias toward overconfidence. In one study, participants were asked to examine spreadsheets and then state their confidence in them. Amazingly, they rated the larger and well-formatted spreadsheets much higher than large plainly formatted spreadsheets, and also higher than small spreadsheets, regardless of formatting. Given the fact that there should be a higher probability of errors in larger spreadsheets than smaller ones, their confidence was completely unjustified. Unfortunately, overconfidence is universal and one of the most well-established biases in the behavioral sciences. Yet overconfidence isn’t the only thing going on here with the spreadsheet samples. Having a bias for the more well-polished ones mirrors other known biases as well. For example, it’s been proven that in politics our bias is for better looking political candidates. If a candidate is good looking, we’re likely to rate him or her as competent and smart; if not, we’re likely to rate the person as more incompetent and less intelligent (known as the halo effect). They’re each corrosive because they blind people from taking the necessary steps to reduce risks.

A State of Denial

All in all, the universality of spreadsheet use and the associated errors present a disturbing picture. Despite all of the research, organizations seem to be in a state of denial and fail to put into place even simple controls to reduce errors, much less have a comprehensive code inspection process. One of the reasons for this might be that we’re prone to see ourselves as an exception to the rule. While we can understand the power of bias in a general sense, meaning we can estimate its impact on others, it’s been shown that we tend to think we’re personally (or our group) exempt from it. Self-deception, it turns out, arises from the failure to apply valid social theories to oneself. Until these basic biases are recognized and changes made, we can expect more of these tragic consequences in companies today:

• Finance executives are less and less likely to spend enough time analyzing their critical financial data.
• CFO’s & finance teams are losing credibility from preventable spreadsheet errors.
• Companies will remain at risk for more serious financial data surprises that impact operations.

As we all know, bad data leads to bad decisions. And bad decisions affect the bottom line.

Intuition Isn’t A Solution

Did you know that studies show that a whopping one-third of senior finance executives admit that their organization relies too much on “gut feel” for decision making? Um, what if lunch didn’t digest well and the gut isn’t feeling so great that day?! It’s common sense to know that bottom-line decisions shouldn’t be consistently made based on a hunch or feeling. We can see this intuition issue in many areas of the reporting process. Perhaps the most glaring example is the lack of quality control to ensure the data accuracy of financial spreadsheets. Clearly the bias of relying on intuition has overridden stricter measures. It’s not that people don’t see the problems of reporting in spreadsheets. They do, and the statistics show that. But the overconfidence bias, fed by our reliance on intuition, primes us for making poor judgments about things requiring more detailed inspection. Consider formula writing as an example. Research shows that unless the results look obviously wrong, spreadsheet developers don’t try to determine if the formula they used is correct. This allows survival of many subtle, but important errors, even when the developer really knows approximately what the correct answer should be.

A Must-Have Picture of Quality Control

Given the brutal facts, our next blog will focus on what quality control would have to look like in a fully committed spreadsheet environment to ensure your organization is getting good data. And thereby able to make good decisions. Experts have much to say in this area and we’ll give you a picture of absolute musts for maintaining spreadsheet use in your reporting. Stay tuned! And Happy Holidays! For an in-depth look into spreadsheets, download our white paper: Spreadsheets – The Corporate Secret Killer & What To Do About it.