Academic journal article Journal of Accountancy

The Merits of Thinking the Unthinkable

Academic journal article Journal of Accountancy

The Merits of Thinking the Unthinkable

Article excerpt

You're about to embark on an important project. You think it will be a success, but you can t be sure. So you imagine that, a year down the track, your project has failed. Then you seek answers: What killed it? How could failure have been avoided? What other kinds of low-probability events could have shut down the project?

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Executives, spooked by devastating "black swan events" during the financial crisis, are increasingly examining these kinds of what-if scenarios to stress-test risks in a potential strategy or to re fine contingency planning.

One such exercise, the premortem, aims to identify potential problems to improve a product, project, or strategy before deployment--rather than learning painful les sons from a real-life implosion.

"The premortem tells everyone that it's OK to think about worst-case scenarios," said Mark Beasley, Deloitte professor of enterprise risk management at North Carolina State University's Poole College of Management. "It's a way of presenting the negative in the context of a strategy."

For decades, researchers have studied the benefits of "prospective hindsight." "Traveling forward in time to look backward on a future event might improve decision-making, by helping people see the more necessary ingredients," researchers Deborah J. Mitchell, J. Edward Russo, and Nancy Pennington wrote in a 1989 Journal of Behavioral Decision Making article.

John Huston, manager of Ohio TechAngel Funds, has applied that kind of thinking to the due-diligence process his teams conduct on potential investments. Premortems get him and his team thinking about risks they wouldn't normally have considered. "It has added an extra level of certainty when we [make] decisions," Huston said.

Huston asks his team to imagine it's a year later and that their investment has fated. …

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