NEURO-FINANCE LAB@APG

A workshop on insights and a demonstration of

brain analysis

Frank Hartmann

Ruud Hendriks

AGENDA

• Introduction & agenda 09.15 – 09.35: Frank Hartmann

Ruud Hendriks

• Different view on risk management 09.35 – 10.35: Ruud Hendriks

Break 10.35 – 10.55

• Studying the brain & EEG demo 10.55 – 11.55: Frank Hartmann

• Discussion (of theses) 11.55 – 12.15

5 June 2015

INTRODUCTION FRANK HARTMANN

• PhD University of Maastricht

• Since 2005: Rotterdam School of Management

• Professor of Management Accounting & Management Control RSM

Erasmus University

• Dean of Executive Education RSM

• Brain research in financial decision making

35 June 2015

INTRODUCTION RUUD HENDRIKS

• Career started by finishing education and training at “Koninklijk

Instituut voor de Marine (KIM)”

• As naval officer (submariner), participated in several submarine

operations/missions, including former Yugoslavia

• Since 1996 national and international management functions,

specialized in large complex change programs

• Since September 2011 at APG

• Program Manager Program Incasso

45 June 2015

GOAL OF THIS WORKSHOP

1. To give insight in the way we think and how we think to

influence our decisions

2. Some food for thought

55 June 2015

PROGRAM MANAGEMENT

& DECISION MAKING

Manage the unexpected

Ruud Hendriks

THE “EXPECTED”

• In Programs and projects we want to mitigate risks by:

– Plans

– Lessons learned

– Risk – logs

– …

Increase

predictability

“It’s been expected and

so its likely to happen”

75 June 2015

BUT WHAT ABOUT “THE UNEXPECTED”

• Anything could happen, and probably will

But how do we manage the

unexpected?

85 June 2015

“Be unpredictable to survive”

95 June 2015

SMCC (SHORT FILM)

• SMCC = Submarine Command Course

105 June 2015

PARADIGMA SHIFT

Deming Boyd

(PDCA) (OODA)

Deming Boyd

(Command/Control) (Information Based)

115 June 2015

OODA

• Allocating

attention

• Sense making

• Anomalizing

• Updating

• Interacting &

Communication

• Containing the

unexpected

• Resilience

K.Weick & K.Sutcliffe (2013)

125 June 2015

ALLOCATING ATTENTION

• Proactively

– Attention can be allocated to scan the environment looking for potential

problems

• Reactively

– Attention can be allocated in response to some sort of stimulus

Manage the flow of attention

135 June 2015

SENSE MAKING

• Discernment

– Appreciating the

significance of data

elements and its meaning

– Meaning is sensitive to

some details of the current

situation

Develop expertise

145 June 2015

ANOMALIZING

• Capability to avoid treating small

perturbations as normal

• Alertness to discrepant details

Mindful infrastructure guards against mis-

specifying, mis-estimating and

misunderstanding things

5 June 2015 15

UPDATING, INTERACTION &

COMMUNICATION

• Updating

– Ability to modify understanding of a situation either

• Situation has changed or evolved over time

• Initial assessment was flawed

Requires doubt

• Interaction & Communication

– Tasks and workflow interdependencies can create

ambiguity

– Ambiguity requires discussion and active listening

165 June 2015

CONTAINING THE UNEXPECTED

• Ability to delineate the boundaries of a

specific problem and encapsulate it

• Ability to work within the problem space

to begin to resolve the problem

175 June 2015

RESILIENCE

• Ability to properly adapt to stress and adversity

• Positive emotionality; effectively balance negative emotions with

positive ones

Treat as opportunity rather than threat

185 June 2015

OODA

195 June 2015

CASUISTRY

The Go-live moment of the new INC process

- The whole year major pressure to go live

- Point of no return has been passed

- No fallback scenario available

- External & Internal communications were informed and had

high expectations

- We went live, but after 3 days the STP-process was hampered

by,

- False parameters for the new (e.g. current) year

regarding Loyalis

What would you do?205 June 2015

CASUISTRY

Running for more than 2 years and then…

- DB connections randomly failed while running

- Vital steps in the process were skipped which relates

to:

- Slow performance

- Corrupt data base

What would you do?

215 June 2015

SHORT BREAK

225 June 2015

ACCOUNTANTS &

RATIONAL DECISION MAKING

A look into the brain

Frank Hartmann

245 June 2015

OVERVIEW

• Managing the unexpected

– The importance of risk management

– Can we (should we) model human decision making behavior?

– From command and control to free-format

• Unexpected aspects of management

– Brain analysis (EEG)

– Rationality and intuition

– Controllers’ fiduciary obligations

255 June 2015

RATIONAL DECISION MAKING

• Intuition and rationality are concepts that have occupied

thinkers about humanity for (literally) thousands of years

265 June 2015

PHINEAS CAGE

275 June 2015

RATIONAL DECISION MAKING

285 June 2015

NEUROSCIENCE

Dendrites

Axon

terminal

branches

Axon

Cell

body

Action

potential

Action potential causes an electric

current – detectable at scalp level

(EEG)

Active cell uses energy, supplied

through increased blood flow –

detectable through microwaves

(fMRI)

295 June 2015

NEUROSCIENCE

• The science that AO investigates neurobiological origins

of behavior

• Measures AO the activity of nerve cells (neurons) in the

brain

Motor cortex

305 June 2015

MEASURING BRAIN WAVES: EEG

With(out) bodily activity, brain

activity is observable – different

wave patterns signal different brain

states

Wave patterns change in reaction to

external stimulus – showing

increase or decrease of frequency

band

Event Related Desynchronization –

external stimulus distorts resting

state (stable) brain wave pattern in a

prespecified frequency band

Delta < 3.5 Hz

Theta 4-7 Hz

Alpha 8-13 Hz (visual cortex)

Mu 8-13 Hz (motor cortex)

Beta 14-30 Hz

Gamma 30-80 Hz

315 June 2015

FMRI LAB

325 June 2015

EEG LAB

335 June 2015

RATIONAL DECISION MAKING

• Are controllers rational?

345 June 2015

COMPANIES’ FAILURES

• Analyses of companies’ financial demise often point to

flaws in the boardroom or the functioning of the (internal)

audit system

• Normative theory on controllership suggests that

controllers should guard against goal-incongruent and

unethical managerial behaviors

• But can they?

355 June 2015

TENSION IN UNIT CONTROLLERS’ ROLES

• Decision making

support

– Requires

involvement

– ‘local consultant’

• Corporate

supervision

– Requires objectivity

– ‘corporate policeman’

365 June 2015

OUR STUDY

• Social pressure has been identified as an important

cause of controllers’ violations of their fiduciary roles

– Explicit social pressure

– Implicit social pressure

• Does a controller’s tendency to give in to social pressure

have a neurobiological origin?

– …is it hardwired?

375 June 2015

MIRROR NEURON SYSTEM

• Rizzollati (Parma, Italy)

• Accidental discovery in

1995

• Research on macaque

monkey motor neurons

• Ventral premotor cortical

area

385 June 2015

MIRROR NEURON SYSTEM

• Same neurons fire when executing and when observing

an action

395 June 2015

MIRROR NEURON SYSTEM

• Crucial in accumulation of experience

– By watching another animal perform an action, an animal can

emulate a task and potentially understand the intent behind the

action

• Social role

– Knowledge sharing - important to survive in hostile

environments

– No need for a mirror neuron system for solitary creatures

40

HUMAN MIRROR NEURON SYSTEM

415 June 2015

HUMAN MIRROR NEURON SYSTEM (HMNS)

• hMNS functioning accounts for some forms of social

(dys)functioning

– Autism

– Empathy

– Imitation

– Theory of mind

– Perspective taking

425 June 2015

THE HMNS AND ‘EMPATHY’

• Empathy

– The ability to identify with the feelings, thoughts, or mental

states of other people (putting yourself “in the shoes” of

someone else)

• Humans are normally able to do this quite well once fully

developed (autistic people seem to have a lack of

empathy)

435 June 2015

THE HMNS AND AUTISM SPECTRUM

DISORDER

• DSM V (Autism Spectrum Disorder – 299.00, F84.0)

– Persistent deficits in social communication and social interaction

across multiple contexts, as manifested by the following (…):

• Deficits in social-emotional reciprocity, ranging, for example,

from abnormal social approach and failure of normal back-

and-forth conversation; to reduced sharing of interests,

emotions, or affect; to failure to initiate or respond to social

interactions.

• Deficits in nonverbal communicative behaviors used for

social interaction (…) poorly integrated verbal and nonverbal

communication (…)

445 June 2015

THEORY

• Does a controller’s tendency to give in to social pressure

have a neurobiological origin?

– We considered that the controller’s ‘empathic ability’ would

predict influencability under emotional social pressure

• Hypothesis:

– hMNS activation predicts tendency of controllers to compromise

fiduciary duties – especially when superior’s fate is at stake

455 June 2015

METHOD: EEG MEASUREMENT

465 June 2015

METHOD: CONTROLLER BEHAVIOR

• Six scenario’s describe professional situations a

controller may face

• Likert-scaled question: ‘would you go along with this’

Ben is BU manager and direct supervisor of BU controller Claire. Their

company is starting the budget rounds for the coming year. As BU

manager, Ben is responsible for meeting the target, which the BU will fail

to meet this year due to unforeseen market circumstances. Ben fears the

risk that the BU will miss its target again next year. This could cost him his

job as BU manager. Ben tells Claire he is very afraid of losing his job,

which would put him in serious personal trouble. He therefore wants to

include a safety margin in next year’s budget proposal by submitting a

lower sales budget than the best estimate. HQ do not have sufficient

market insight to detect this.

475 June 2015

FINDINGS & CONCLUSIONS

• Controllers whose hMNS shows more activation give in

more to emotional pressure

• Neurobiological origin of controller competences

– Stereotypical picture of ‘accountant’

– Implications of effectiveness of HR- and corporate ethics

policies

485 June 2015

THESES

A workshop on insights and a demonstration of

brain analysis

Frank Hartmann

Ruud Hendriks

THESIS 1

Decisions are more often based on intuition

than on ratio

505 June 2015

THESIS 2

Risk avoidance requires “fast thinking”

instead of “slow thinking”

515 June 2015

THESIS 3

Our current control systems are unable to

manage the unexpected

525 June 2015

THESIS 4

Our current education of controllers does

not prepare well to manage the unexpected

535 June 2015

THESIS 5

Risk management requires more

complicated control systems

545 June 2015

THESIS 6

Risk management requires a more positive

attitude towards ‘risk’

555 June 2015

QUESTIONS?

Vragen

Ερωτήσεις Fragen

Domande

Preguntas

Perguntas

Questions?

CwestiwnQuestions

565 June 2015