One of my earlier posts titled "Statistics hints at Existence of God" <<click here for the post>> detailed how the error component of any model hinted at a philosophy that is analogous to concluding the existence of God. While, this explicitly states that God exists, today's post is about why this God should not be omnipresent and should not be implicit in the statistical model.
A key element of the modern day God and his relation with humans is the fact that God endowed humans with the capability of free will. One definition of God is an entity that is "all knowing". This entity knows the past, present and the future. In fact, he defines the future. God gave human the capacity of free will. It is argued that this was done out of his love for mankind. But this also represents a paradox in the way we define and understand God. The free will of humans gave it the option of wrong choices. Thus, emerged the possibility that God cannot now know the future since he does not dictate the choices man makes which in turn defines the future. God, hence, took a big risk in creating humans as free thereby including the possibility for wrongful choices.
Can a statistical model embody that spirit of granting free will? Lets look at the not so past sub-prime crisis. Every financial institution that went bust or lost in the crisis were big users of statistics. There were numerous case studies published of how these institutions used statistical scores to take decisions and thereby improve business parameters. While the employees, or human kind, followed the dictates of the statistical decision, business was thriving.
Then some mortals realised that the asset prices are ballooning. So even if the creditor defaults, the bank could recover their money by forcing the creditor to liquidate the asset. Or the bank could attach the asset of a lazy creditor and auction it at a much high price than the outstanding loan amount. The default scores or credit scores were rendered powerless. Though the model scores showed that the customer has questionable ability to earn and service the loan amount, the institutions still over rode this decision and went ahead with granting the loans. History knows the derivatives and the leveraging that was done on these loans. But our debate lies with the initial event and not the derivatives.
The statisticians or the analytics sponsors in these institutions, be they the Business Intelligence heads or the CxOs, decided to play God. They granted free will to the consumers of the statistical models. This was probably done for the love they had in the employees capabilities and in the potential profitability. But they did not account for the risk of wrongful decisions. Eventually, when the risk became a substantiated object, the Garden of Eden was lost. To some, it cost their very existence.
If only, the sponsors had not played a loving God but a tyrant one, forcing the business to follow the scores of the statistical models, they could have survived the crisis much healthier. And there have been some institutions, albeit a few in number, who stayed with the statistical models and refused to permit free will to the business consumers or employees.
This shows a key lesson for companies adopting analytical expertise. A vast knowledge of historical knowledge is accumulated in the final, adopted statistical model. This knowledge is much greater than any individual employee. Hence, it is critical that the business processes are designed such that exceptions or over-rides are minimized, if not eliminated. Every time employees or processes are allowed to override analytical models, business has faltered and eventually the statistical approach is blamed. In such scenarios, it is not uncommon for the enterprise to abandon its analytical approach completely. And we hear comments such as "we tried analytics in the past and it does not work". This statement in a time when there are numerous examples of statistical applications in the same scenario being referred.
So, note this good, if you are deploying analytical approach in your enterprise, do not play the loving God and grant free will to the consumers of analytics.
