The Dark Side Of Goal Seek

Withholding information from your experts can actually improve their objectivity and accuracy.

Sometimes it can be months or years before we realize our mistake. Other times, we know it the instant the words leave our mouths.

It was the latter when I was teaching business case development to a group of project managers. I mentioned how Excel’s “Goal Seek” corrects a common valuation error. Some participants had not heard of this spreadsheet function so I demonstrated how Goal Seek instantly calculates the input required to achieve a particular Internal Rate of Return (IRR) for the project.

One Project Manager excitedly announced how Goal Seek will help her calculate what benefits are required to justify her projects. I immediately realized the damage I had just initiated.

Anchoring
My ability to produce objective estimates is handicapped when I know what benefits (e.g. cost savings) are needed to clear approval hurdles. It is a phenomenon called “anchoring” where a previously introduced number biases our estimates.

Even the most unrelated values bias the estimates of intelligent individuals. In one particularly bizarre example, participants of an MIT experiment were asked to write down the last two digits of their social security number. They were then asked to estimate the value of an unfamiliar bottle of wine. Even though their social security number was unrelated to the wine, having that number in their heads produced a profound impact on their estimates: Those with higher two-digit numbers bid between 60 and 120 percent more than those with lower two-digit numbers.

If random, unrelated numbers influence our estimates, how can we deny that related numbers such as goal seek targets also affect our judgment?
In reality, my introduction of Excel’s Goal Seek function to those project managers did not introduce a new temptation. They all acknowledged regularly reverse-engineering input targets using trial and error – Goal Seek simply saved time.

On Guard
To avoid anchoring and improve the quality of project proposals, capital processes need to take steps that prevent anchoring from occurring. Financial analysts need strict instructions against providing project teams with input targets – not even ballpark guidance. Project teams and leaders need equally strict instructions against reverse engineer these numbers on their own.

This does not call into question the integrity, intelligence or experience of our people. It is simply a very sound and effective decision discipline that improves the quality of the information delivered to decision-makers.

© 2011 Verax Point Consulting, LLC

About Dave Wittenberg

I am all about equipping business teams to enjoy greater payoffs on their biggest bets. I bring a unique combination of evaluation expertise and behavioral insights developed over the course of more than 300 major strategic initiatives. Applying a highly effective, disciplined framework, teams unleash their full capabilities to generate better solutions, wring out hidden waste, and deliver superior returns. Specialties: Investment Evaluation, Decision Excellence, Strategic Analysis, Mergers and Acquisitions, Investor Relations, Leadership Development, Education & Training
This entry was posted in Biases & Traps, Valuations. Bookmark the permalink.

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