by Rick Nason PhD, CFA
Partner RSD Solutions Inc.
I had a guest speaker in my capital budgeting class last week. They were explaining to my students the various capital budgeting techniques that they used at their firm. The speaker then stopped and said – in a moment of frankness – that in reality a lot of capital budgeting decisions were premade for political reasons long before a calculation was even begun.
All organizations involve people, and whenever people are involved so will politics be involved. As much as we in academia and the consulting fields like to think of ourselves as being purveyors of great rational concepts, the reality needs to be explicitly recognized that politics more often than not trump rational decision making.
When you read the title of this blog, I suspect that you thought I was going to blog about governmental politics. While changes in government policy are definitely risks to be managed, they are risks that are relatively easy to manage due to their transparency and openness. We expect elected officials to act in their own political interests.
I conjecture that the far bigger political risk is the internal political risk that affects the rationality of risk decision making within an organization. These are risks that are not discussed for (wait for it) principles of political correctness or politeness. We are starting to get some rumours out that internal political decisions in the crippled nuclear reactor in Japan may have made the crisis worse – against rational decision making. Are political risks influencing risk decision making in your organization potentially leading to a melt-down?
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