Over the last couple of days, I’ve been relaying some of the lessons learned from the aftermath of the financial crisis last fall, as reported in a series of articles published in Harvard Business Review this month. When a plane crashes, people want to know what went wrong... The same is true with the economy.
One of the primary causes of the financial crisis was an over-confidence in financial models that did not prove reliable. Surprisingly, these models were built on data and rational thought.
For example, if no more than 2% of the population has ever defaulted on their mortgage in any given year for the past 30 years, it is rational to conclude that no more than 2% will default in the years to come as well, right? However, this pattern did not hold true...the models were wrong. The HBR article puts it this way:
“Data, computing power, and mathematical models have been transforming many realms of management from art to science. But, the crisis exposed the limitations of certain tools. In particular, the world saw the folly of the reliance by banks, insurance companies, and others on financial models that assume economic rationality, linearity, equilibrium, and bell-curve distributions. As the recession unfolded, it became clear that the models had badly failed.”
So, is it time to pitch the idea of using data to solve problems and manage more effectively? Probably not. It makes sense to utilize data when making a decision, but realize an over-reliance on information alone, may lead you astray.
This balance reminds me of the equilibrium that Captain Kirk and Spock discovered in the legendary Star Trek series. While Spock’s cold, hard facts were important, the Vulcan logic alone was not sufficient to arrive at the right decision. Additionally, Kirk would consult his gut-level intuition before pulling the trigger. The combination was effective.
If you’re a hiring manager, you need to find this balance as well. It is important that a person “look good on paper,” but that is never the whole story. Without verifiable competencies, work history, and education, it is foolish to move someone forward in the hiring process. From a data perspective, it is also important to verify additional sources of information, such as assessment data, via factual questions during an interview.
Once you have supporting data, trust your gut to make the right decision. Your intuition can tell you things that the data will never tell you. When you “feel” a red flag, listen to your instinct and pull back. When the data looks good and your gut is confirming the data, make the decision with confidence.
In the financial world, it should have “felt” wrong to close a mortgage for someone with no income and no assets (this is a called a NINA loan), but that is exactly what many financial institutions did because they trusted their financial models. Hopefully, you won’t make the same mistake with your candidates.
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