Quantitative Management vs. Quantitative Thinking

It is better to be vaguely right than exactly wrong.
Carveth Read

When I first learned double-entry accounting, I was struck by how elegant some of the constructs were. There is a joy in knowing exactly where each number was supposed to go over the profit cycle of a business, when it bought assets and amortized fixed costs and generated a clear and continuous indication of profitability by using accounting as a type of low-pass filter smoothing out the cash flow.

I later realized accounting in reality doesn’t work nearly so neatly. It isn’t so much that the accounting constructs themselves are flawed – it’s more that when interpretation is needed it’s common to find the convention of conservatism being applied, and as such a precise but inaccurate answer being the standard.

This is due to the fact that the numbers that appear in accounting are more used for managerial oversight by owners, and not as quantitative thinking tools in their own right.

The statistics and biology used in clinical trials seem to fall in this category as well. Statistics is scientific accounting, and the audience in that case is the FDA.

The risk control applied in banks is another example. There statistics feed directly into accounting, and again are done in ways that are more precise than accurate.

Most of the numbers that appear in our daily lives are there for their ability to be objective. As such, the techniques which produce those numbers have been tweaked to be as precise and ungameable as practical. That precision often comes at the cost of accuracy and space for intelligent judgment.

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