Thursday, July 5, 2012

Why zeroing out the budget template is a good idea

Episcopal News Service reports that the budget committee (known as PBF in other sources, but I'm trying to avoid insider terms) will use the Presiding Bishop's alternative budget as its template. This is welcome news, since the appearance, if not the substance, of the alternative budget is much more mission-oriented. And if there's anything our church is called to be, it's mission oriented.

There is some minor controversy over whether the line items in the template should be zeroed out or not. From the Episcopal News Service report (read the whole thing here):

But, cautioned Diocese of Maine Bishop Steve Lane, PBF vice chair, “when the template comes, it’s not going to be full of zeroes; it’s going to have line items in it and then you are going to decide about those.”

“We’re not picking a budget, we’re picking a starting point,” said PBF member Steve Smith, a deputy from Vermont.

However, the Rev. Canon Mally Lloyd, Massachusetts deputy, called for the template to be zeroed out because using the numbers from either budget “gives too much weight to that particular budget.”

Lane said zeroing out the numbers in each line item or either budget would greatly increase the work of the committee’s subsections that will work in detail on different sections of the budget “rather than looking at it and making adjustments.”


Not zeroing out the budget is a terrible idea. In my professional life, I'm an investment analyst. My colleagues and I have been spending quite a bit of time over the last few years studying behavioral finance, specifically the psychological biases people bring with them when they look at numbers. The specific one I'm worried about here is anchoring.

Here's what I'm talking about (from youarenotsosmart.com)

In 1974, Amos Tversky and Daniel Kahneman conducted a study asking a similar question.

They asked people to estimate how many African countries were part of the United Nations, but first they spun a wheel of fortune.

The wheel was painted with numbers from 0 to 100, but rigged to always land on 10 or 65. When the arrow stopped spinning, they asked the person in the experiment to say if they believed the percentage of countries was higher or lower than the number on the wheel.

They then asked people to estimate what they thought the actual percentage of nations was.

They found people who landed on 10 in the first half of the experiment guessed around 25 percent of Africa was part of the U.N. Those who landed on 65 said around 45 percent.

They had been locked in place by the anchoring effect.

The trick here is no one really knew what the answer was. They had to guess, yet it didn’t feel like a guess. As far as they knew, the wheel was a random number generator, but it produced something concrete to work from.

When they adjusted their estimates, they couldn’t avoid the anchor.


In other words, not zeroing out the budget line items will cause committee members to adjust line items higher or lower without considering whether the starting numbers make any sense at all. The probability is therefore high that we wind up with some moderate adjustment to the Presiding Bishop's budget, not the visionary document many of us are (perhaps unreasonably) hoping for.

So the budget line items committee members see on their templates may or may not be zeroed out. But the good news is that is takes nothing more powerful than a Sharpie or the delete key in Excel for them to zero it out themselves.

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