Compensate complexity with simplicity

“Budget are useless, they prove to be wrong within just a few weeks. This time consuming activity is useless, why do we carry on with budgeting”. Such was the essence of a conversation I have been exposed to recently. Most of the participants nodded to the comment activating their mental System 1 (Kahneman, 2011), but I wasn’t, and my system 2 said in my head, how could we articulate an answer to this statement.

Hayek, the famous economist has been a strong contributor to the conversation about complexity theory (Gauss 2006). His specific contribution was to stress a distinction between the human capacity to predict the behaviour of simple systems and its capacity to predict the behaviour of complex systems through modelling.

He believed that economics and the sciences of complex phenomena in general, could not be modelled after the sciences that deal with essentially simple phenomena. Hayek would notably explain that complex phenomena, through modelling, can only allow pattern predictions, compared with the precise predictions that can be made out of non-complex phenomena.

Competition in markets has frequently been compared to the art of war. Applying Complex Adaptive Theory to war, Solvit (2012) studies influential war theories (Machiavelli, Clausewitz, Sun Tzu,…) and observes how these theories simplify and reduce war in terms of time, space, interaction, purpose, aim, and/or evolution. Yet war is alive. It is a complex adaptive system that consequently is a generative social phenomenon, uncertain and self-modifying. Solvit exposes its unpredictability, complexity, change, and “generativeness”. War is a complex sequence of actions in constant motion, and its multi-dimensionality implies that the reasons for war change throughout war.

If we agree that today’s economy owns many of the characteristics of complexity, organizations can’t model their predictions using sciences designed to model simple phenomena. Competition in markets may resemble war in that it is unpredictable, uncertain, self-modifying. Therefore, the reasons for a strategy change through out its execution.

Firms draw strategic plans, sometimes detailed plans. They spend a significant amount of time to budget their future activities. Does it involve that budget exercises are useless, with the justification that estimates prove to be wrong very quickly? If these exercises are mechanistic, “we spend too much time filling in Excel spread sheets, so that corporations can report to shareholders…”, the answer is yes, the process is inappropriate. But managers need simplified models to make decisions, and to be able to act. If we conceive of budgets and plans as intermediary objects, they become a unique opportunity to share views, to visualize assumptions, to expose a vision about the future, and to coordinate alternative business opportunities. What is essential in budgeting and planning is the conversation that goes with it. This type of exercise should allow for rich conversations rather than just excel reporting.

References:

Gauss, G.(2006). Hayek on the evolution of society and mind, In: Edward Feser, dir., The Cambridge Companion to Hayek, Series: Cambridge Companions to Philosophy, Cambridge, UK ; New York : Cambridge University press, Ch 12, pp232-258

Hayek, F.A (1967). The Theory of Complex Phenomena. Studies in Philosophy, Politics and Economics, London, UK: Routledge & Kegan Paul, pp. 22-42.

Kahneman, D (2011) Thinking Fast and Slow, Farrar, Strauss and Giroux, New York, NY

Solvit, Samuel (2012). Dimensions of War: Understanding War as a Complex Adaptive System. Paris, France: L’Harmattan. ISBN 978-2-296-99721-9.