The High and Low of Critical Thinking

If you have a problem to conquer, the first step is to define or frame the problem.  This leads to generating recommendation for solution, conducting analysis, and finally coming to an executable solution.  It sounds like a really simple 1-2-3-4 step from problem to solution. 

But we all know, if all were this simple, we would not have nearly the number of problems that are evident today.  Problems would not last long and would be always in process of discovering an answer and working through to resolution. 

Many times, problems are never solved as we spin out of control during the analysis phase.   Mike Figliuolo notes a good analysis requires both a high road and low road approach.  The high road is like soaring above the issue to see the overall goals, problems, and obstacles.  The low road involves the hard analysis crunching to validate the answer and direction.  There are dangers in not achieving a balance between the two and it can get easy to be trapped in one or the other. 

I once worked for a bank that stayed exclusively on the high road to long when it created a new program for a business line of credit with immediate underwriting.  The leadership thought adding lots of small balance business lines of credit would be a good introductory product to gain more customers.  They desired to get this out to a broader audience, so they allowed retail employees to sell business products which they had no experience in.  When asked about underwriting standards, leadership commented that using disciplined standards to review requests would make the product unprofitable due to the high cost to underwrite the credit.  Time and effort were put into the selling of the product with new contests, incentives, and goals for all front-line personnel. 

The lack of diving down into the low road kept the bank from detailed study of loss rates compared to various underwriting standards.  A few years into the program, the bank abandoned it as they experienced millions of dollars of loss from poor underwriting and fraudulent borrowers.

On the other hand, one can get caught up in the fun of crunching numbers, excel spreadsheets, charts and graphs that never reach a decision point save for one item, more data is needed.  This analysis paralysis results in extreme amounts of busywork without any solid recommendations for action.  Another bank I worked for decided to take any analysis from the field officer’s duties and place it in centralized underwriting pods with analysts who had no physical contact with borrowers or even the field lenders themselves.  Our analysts were located a mere three-hour drive time away.  Analysts were hired and promoted n their ability to generate questions and research no matter if any new credits were actually produced. 

I had an established borrower that we had financed nearly twenty different condominium construction projects.  Each one was successfully built on time and in budget, and units were sold as quick as they were finished.  A new request came for the next building which was sent, for the first time, to the credit analyst in the newly restructured division.  After a month of providing various items to review, our construction inspector approving the budget, and the appraisal, I finally received a lengthy and detailed analysis of the request that arrived at no conclusions, but requests for more data.  Most of the questions revolved around items in the construction budget which aggregated to 1.5% of the overall total.  This was after our construction engineer had approved the budget and we had verifiable cash from the sponsor for nearly 75% of the loan request.  Yet no decision could be reached from the analyst as she stayed stuck in the low road.  The customer went to another bank and received approval within a couple of days. 

Successful execution of the high road analysis involves the following:

·         Have a clear definition of the problem.
·         What is the analysis telling you about the problem?  What is being proved or refuted?
·         Estimate the benefit of doing analysis before pulling lots of data.  Try to rank possible solutions and pull data in order of your rankings.
·         Think of the Pareto Principle:  20% of the efforts usually result in 80% of the results.  Focus on those items most important.
·         Short bar-napkin analysis can frame issues.
·         Constantly think your thinking.  Do the answers you see, support or refute your recommendation?·         Look for similarities and differences in other problems in the past that may offer clues to a solution for the current problem.

The low road or “getting deep in the weeds” analysis, needs to be successful as well.  Some suggestions to do this are:

·         Only run the numbers and look at the data you need to run.  Time is precious and do not waste it.
·         Don’t stay buried in the data for too long.
·         Pop back up to the high road every so often.  What are the data teaching you?
·         Don’t try to polish dirt.  This is when you continue to look at more information that wastes time and does not give you more clarity on the credit risk or problem than you already have.
·         Don’t try to push a rope uphill.  This is when you preestablish the outcome and force data into supporting your decision when the data does not support it.
·         Focus your attention on answers that really matter.

Successful critical analysis requires a balance between both the high road and low road approaches.  An imbalance between the two may result in wasted time, errant conclusions, and poor direction.  Strive to use both well for greater efficiency as you solve complex issues.