Math Does Matter

When you mis-use a metric, even a good one can lead to disastrous conclusions.

“The young man knows the rules but the old man knows the exceptions.”

– Oliver Wendell Holmes

Juxtaposition fans, rejoice. The Washington Post has done it again!

In an opinion piece titled, “How much math do we really need?” (10/23/2010) G. V. Ramanathan, professor emeritus of mathematics, statistics and related subjects at the University of Illinois, Chicago argues, “Unlike literature, history, politics and music, math has little relevance to everyday life.”

It appears Ramanathan knows math better than self-reinforcing feedback loops: Math has little relevance to those who have decided it has little relevance.

Among them, it appears, is the Washington Post editorial team, because a recent Post editorial titled “Democrats’ failed bid to curb outsourcing had some crucial flaws,” (9/30/2010) contained a crucial flaw of its own, namely, its mathematical reasoning.

According to the editorial, “A 2008 study by economists Mihir Desai, C. Fritz Foley, and James Hines of Harvard Business School found that domestic investment by U.S. firms grows by 2.6 percent for each 10 percent increment in the companies’ investment overseas.” It cited this as evidence of the economic benefits of sending work offshore.

Had the editorial team been more adept at mathematical reasoning, it might have compared this 2.6 percent benefit to the growth of domestic investment by U.S. firms when they invest the same 10 percent increment domestically instead of in foreign subsidiaries.

Which would be … let’s see … carry the one … that would be … hmmm … 10 percent — nearly four times bigger.

And why percentages? If a company has $1 billion in U.S. assets and a hundred bucks worth in Malaysia, then investing another ten bucks in Kuala Lumpur should yield $26 million here.

Sign me up!

The most important reason to learn more math (and science; the two go hand in hand) is, clearly, self-defense.

The paper’s authors were, thankfully, more cautious in their assessment than the Post. They limited their conclusion to recognizing that investments in foreign subsidiaries correlate with increases in a firm’s domestic activity, rather than the decreases many expect.

They were silent on the comparison between the impacts of investing in foreign and domestic subsidiaries, and said nothing at all about outsourcing.

When an organization as respected as the Washington Post commits reasoning this specious, it’s a warning to us all.

Bad logic is a non-partisan crime. Here’s how more knowledge of science and math might have kept the Post out of trouble:

Scientists know to understand the hypothesis being tested. In this case, it was U.S. companies that invest in foreign subsidiaries invest more domestically than companies that don’t invest anywhere. They’d spot the difference between it and other, related hypotheses such as, the U.S. is better off when a company invests abroad than when it invests domestically — what the editorial claimed was demonstrated.

The editorial’s phrasing also strongly implied a causal relationship. Scientists are more careful. In the cited paper, the researchers were clear that correlation was the best they could manage.

Which isn’t surprising. Anyone familiar with how accounting systems work know they don’t demonstrate cause-and-effect relationships, and in fact very few businesses have any tools for reliably demonstrating the connection between corporate action and bottom-line results (for more on this see “Measure? If you can’t predict you can’t manage,” KJR, 8/16/2010).

Also: The paper’s raw data consisted of individual business results, which were then aggregated for analysis. The results show how those businesses that invested in foreign subsidiaries fared domestically, not how the U.S. economy fared as a result of those investments.

(Here’s why they might be different: Having foreign subsidiaries implies a certain minimum size on the part of the investing companies. Their increased domestic success was probably at the expense of U.S. firms too small to open foreign branches. This consequence could easily cancel out at least some, possibly all, and imaginably more than the cited benefits.)

So here’s what we know: On average, U.S. firms that increase investment in foreign subsidiaries also increase domestic investment.

Here’s what we don’t know: Whether these two increases are connected; how much actual money is involved; whether the firms would have done better or worse had they invested domestically instead; the net onshore impact of offshore outsourcing; and whether the U.S. economy is better or worse off because of the increased foreign investment.

In case you think I’m advocating policy changes, tax changes, or stern looks of disapproval directed toward companies that send work overseas, or you think I’m defending the Democratic Party from an attack by the Post …

Naw. This is meant as a cautionary tale, “Ripped from today’s headlines!”

The point? You deal with parallels every day, in the form of internal analyses and reports from various research firms.

Most should generate more questions, not quick decisions.

Bob Lewis is president of IT Catalysts, a consultancy focused on IT organizational effectiveness, business/IT integration, and helping organizations become more adept at designed, planned change.