Data Overload Can Lead Firms to Self Deception and Ultimately Failure

In the early days of the Web, it dawned on social observers that global innovation would be increasingly fueled by accelerated exchanges of ideas and more rapid access to data.

Organizational consultant Jon Husband coined the term “wirearchy” in 1999 to describe the workplace impact of web technology: a shift from top-down hierarchical firms to wirearchical firms in which information empowered workers could easily connect with like-minded individuals across organizational barriers, innovating faster and more frequently. 

Despite transformative social networking technologies, we are actually operating in a blurred world of centralized and decentralized corporate systems: two forms of corporate governance that co-exist and collide in the same firms. While there are many reasons for this, one in particular stands out, and yet is often ignored:  lack of trust and fear of deception.
 
As command and control systems give way to organizations in which collaboration is more spontaneous and information is shared more rapidly, creativity, employee morale, and productivity take big leaps.

The propensity for risk rises as well: false information can migrate as easily as verified data, employees can be overloaded by the large data volumes and inputs, and businesses that rely heavily on automated decision support can fall prey to massive systemic glitches.

Most of all, though, brain science increasingly tells us that humans are faulty decision makers, and they are often deliberately deceptive ones. Our world may now be wired for rapid collaboration -- but our brains may not.

Lost in a World of Self Deception

Most of us will admit that emotions can color decisions, even in the world of business. Some of the biggest sellers in management books today, most notably Daniel Kahnemen’s “Thinking Fast, Thinking Slow,” go even further, making the case that largely unconscious brain functions predispose us to overly optimistic views of trends and higher levels of risk-taking than would ever be validated by quantitative evidence -- a factor, one could argue, for the severity of boom and bust cycles in finance.

Yet there may be an even bigger challenge to consider: what psychologists and evolutionary scientists see as a genetic tendency to deceive ourselves and others, which is an outgrowth of the evolutionary struggle to survive. If this theory is correct, it has fundamental implications for how we design and operate in our business practices.
 
First, let’s look at the science. Robert Trivers, acknowledged by his peers as one of the greatest pioneers in evolutionary psychology, notes in “The Folly of Fools” that all life forms, from microscopic organisms to humans,  use deception to elude predators and out-perform competitors. Over time the best deceivers survive, which means that instinctive deception is hard-wired into unconscious behavior.
 
Trivers and others, though, take it a step further. A recent Wall Street Journal article, “The Case for Lying to Yourself,” shows considerable evidence that star performers in all professions tend to be excellent self-deceivers, because it makes them (and others) feel that they are more authoritative and in control.

Because deception and self-deception is largely unconscious and automatic, it is hard to distinguish from simple error. Thousands of years ago this aspect of our brain was probably not as big a problem. Trust developed among small human bands, usually as a result of ongoing collaboration; defectors could be tossed out of the clan.

In hierarchical systems, born out of the Industrial Age, close supervision and constant control throughout the process may have stifled creativity, but it ensured trust and created trip wires for error.

In our networked world, many of these trip wires vanish -- and they can’t come back if  companies want to stay quick and agile. We operate in information networks that are not only more interconnected, but more volatile from the standpoint of information and finance. In business, especially in large, complex organizations and in industries with high financial volatility, instinctive deception can lead to disaster on a very wide scale, often in a very short period of time, before any oversight can come into play.

The current Libor rate scandal is an instructive case. One of the more interesting emails to come out of the investigative reporting on the rate fixing by 11 international banks in London was the comment that “we are clean, but we are dirty clean” not “clean clean.” The assumption here is that bankers reporting interest rates were obliged to lie because it was the expectation by government authorities that they should do so to maintain the larger good of financial stability.

This shows both deception and self deception at work. One distorts financial information to achieve better trading returns; one justifies the deception by pointing to an assumed larger good. Without self deception, it would be much harder to be a good deceiver.

Stay Vigilant

Financial systems are now perhaps the most vulnerable to the vagaries of deception, given the combination of complex products, massive transaction volumes, multiple trading systems and overburdened regulators. But no industry is immune. This places a particular challenge on CEOs, CFOs and the risk functions at firms.

All managers recognize that they face the risk of unknowns, whether it’s on the macro level, such as swings in currency markets, to the micro level of whether a customer will pay in 30 days, 90 days or at all.

To hedge against these risks, you might turn toward the internal reporting you get from the system. The consistent record of crises indicates a propensity for overly optimistic reporting. If behavioral psychologists are to be believed, deceptive behavior will be chronic and will be most endemic where the availability of currently relevant, hard data is to be extracted.

The more complex the system, the argument would run, the greater the instinctive advantage to “game it.” The accumulation of seeming small-business deceptions then leads to massive catastrophes. Hence, the long list of seemingly best-in-class companies that suddenly find themselves catapulted into failure.

It may be impossible to separate self deception from miscalculation.

• Did Kodak lose its innovative edge because it did not incentivize creativity? Or did its failure indicate a system in denial, where executives unconsciously deceived themselves and their teams about market indicators.

• Did the AIG exposure to toxic complex derivatives show a lack of foresight or the instinctive exploitation of management and customers who had limited ability to understand such complex products? It may simply be impossible to know.

It may be that what actually distinguishes best-practice companies in our relentlessly networked world is the level of constant vigilance and questioning of procedures. Let’s point to three that make sense:

• Close integration of the corporate financial function with operating units and rapid access to financial data: Senior management really needs to see a minimum of two scenarios on the business: one from the operating team and a second from risk controlling. Variances need to be questioned. 
• Peer analysis: bring in outside operational and risk perspectives. Sometimes this may involve outside risk consultants. In other cases reviews can be elicited from teams drawn from elsewhere in the company. There is a reason why scientific studies are subject to peer review; because bias and false positives need to be ruled out. Businesses can perform the same practice on operations.
• Get personal: Elsewhere we discussed the value of personal, front-line interaction. Managers cannot function by delegation alone. This means getting to that oil rig, manufacturing plant or trading desk and having individual discussions that are operationally specific. Comparing the different points of view and the different information provided is a potent reality check.

Let’s face it. Big data, fast networks and decentralized web based collaboration will surely maximize the risks of deception. If you want to stay ready, verification must become a way of life.

Andrew Goldberg serves as executive vice president of public relations firm Makovsky & Co. Inc.'s Corporate Advisors division, which counsels CEOs and other C-suite executives in restructuring, change management and M&A situations. Goldberg was previously the president of WPP-owned Pivot Red and chairman of the corporate practice at Burson-Marsteller. He earned a Ph.D. at Columbia University in international affairs, specializing in the psychology of decision-makers under stress.