In this lesson, to help push you beyond rudimentary financial analysis calculations, I want to work through an academic research paper with you. Academic papers may not be your first choice of reading, but I think you'll understand by the end of the lesson that this one is pretty special. It's written by an accounting colleague of mine from the UK by the name of Hendrik Vollmer. The paper is called, "How to Do More with Numbers."
And here's a picture of Hendrik Vollmer. One of the impressive things about Vollmer's paper is that he is taking a bunch of different theories about the production and use of accounting numbers, and nested those theories together like a Russian doll. He's got a really solid grasp of what other people have written about accounting, so this article is quite wonderful at connecting the dots between a whole bunch of different theories.
The Social Life of Numbers
His premise is that social situations of any kind, by definition, involve people monitoring each other. No matter what situation you're talking about, whether it's teaching and learning, or a romantic relationship, or a business partnership, a lot of observing of other people that goes on as we try to understand how they're behaving and figure out how to behave ourselves.
When we're talking about accounting, we're talking about the use of financial numbers to monitor other people’s behaviour. Vollmer’s point is that the use of financial numbers to monitor behaviour is intensely social. It’s not just a dry, calculative exercise.
Financial Realism vs Financial Pragmatism
Vollmer draws a contrast between the traditional view of accounting numbers and this social understanding of numbers. He calls the traditional view, the commonplace assumption that accounting numbers faithfully represent some objective economic reality, financial realism. He calls the social understanding of accounting numbers financial pragmatism.
With financial pragmatism, he’s focusing on people's actions around accounting numbers — how they actually use them — not on the information content of the numbers.
Characteristics of Numbers
If you want to look at how numbers and human behaviour are related, says Vollmer, a good place to start is with French social theorist Bruno Latour, who has written much about the social characteristics of numbers. Latour describes numbers as mobile, stable, and recombinable.
By mobile, what Latour means is that you can obviously transmit numbers much more easily than you can transmit the objects that they measure. If you ask me how tall I am, I can give you a number that can be transmitted audibly or on paper or through the internet. You can then imagine how tall I am and use that information to make any decisions you want. Maybe you’ll make me a new suit. This is much easier than having to meet me in person.
Numbers are stable. If I transmit them to you, the number I send is the number you receive. They don't decay in transit the way a shipment of fruit would.
And numbers are recombinable. You can take numbers and compare them to each other. You can add them, you can subtract them. You can do ratios with them to produce more information, as we’ve seen in the lesson on financial statement analysis.
Disciplinary Effects
By these three characteristics, numbers lend themselves to particular uses. Vollmer argues that the meaning of numbers comes from the fact that people know that other people around them are already committed to numbers having a particular use value. You know, for instance, that other people think that numbers about your grades or you wealth are useful, and so you start to take advantage of that fact, for good or bad. You can use numbers that are produced about you as a means of self-expression. You tell prospective employers about your grades. You tell the bank manager about your wealth when you apply for a loan.
In other words, you take advantage of the fact that you are being measured in multiple ways to express aspects of yourself that you want people to perceive. And of course, this can be very opportunistic. For instance, you might choose only to highlight numbers that reflect well on you. Runners, for instance, never talk about their average time for a 10K race. They talk about their personal best. Finance bros talk about their biggest deal, or how much money they make. Wine lovers talk about what year a wine was bottled, or what rating it got from a certain critic.
But of course, not everybody is opportunistic, or at least not 100% opportunistic, so there is still some use value in numeric measurements. The fact that other people are going to use the numbers you feed into a social relationship means that they give you a certain amount of power.
People are disciplined by numbers. They act differently when they know they're being measured. Why is this? It’s because they anticipate that other people are going to interpret the numeric measurements as indicator of who they are as a person, and as symptoms of their behaviour or character. We expect other people to assume a cause-and-effect relationship between our behaviour and the numeric measurement, so even if we doubt that causal relationship, we recognize that the numbers matter. Even if you think that grades are not a good measure of your ability as a student, or that income is not a good measure of your worth as a person, you know that some people — prospective employers or a potential father-in-law — will look at these numbers as indicators of who you are, and that changes your behaviour in relation to these measurements. Other people think that these numbers have objective meaning, so you change your behaviour to take that into account.
Hyperreality
The underlying social theory that Vollmer is drawing on here is the notion of hyperreality, which comes from a French scholar by the name of Jean Baudrillard. Hyperreality is the contemporary situation where the meaning of any sign or symbol — be it a Mickey Mouse hat or a company’s third quarter earnings — doesn’t come from the relationship between the sign and some underlying objective reality, but from the relationship between signs. A Mickey Mouse hat does not simply signify mouse ears, it signifies an idealized version of America that never existed except in movies or on television. A company’s earnings number doesn’t just represent the company’s profits, but participates in the construction of an entire hyperreal world of finance where analysts wait with bated breath for corporate announcements and investors tremble, making investment decisions in anticipation of how indices will react, creating the volatile reactions they hoped to avoid, while students in business schools fashion a new version of themselves that will play a support role in this hyperreality by constructing derivative securities that feed off uncertainty in corporate balance sheets.
The connections that people make between one number and another gives the numbers meaning. My grades are high enough in relation to a GPA cut-off that I can get into grad school. My salary is high enough compared to my credit card balance for me to meet a risk measurement established by my bank and thus qualify for a mortgage. It’s the relationships between numbers that matter, not the numbers themselves.
We've already used this fact in a previous lesson when we created ratio calculations. We compared specific income statement numbers to specific balance sheet numbers to say something meaningful about a company. The meaning of accounting numbers comes from their relationship to other accounting numbers.
This fact about the use and meaning of numbers takes on a special character in accounting because of accounting’s excessive institutionalization. This is a key part of Vollmer's argument. Participants in any field react to numbers based not just on what they think the numbers mean, but on their expectation of how other people are going to react to them, and this is especially so in the case of accounting numbers because of the pervasive, complex, and predictable institutional processes that produce and consume accounting numbers.
As a CFO, for instance, you know that financial analysts are going to jump on your financial accounting numbers the moment you release them, and so you are very careful about the way that you construct those numbers. You act as if the numbers matter, knowing the reaction that is coming, even if you personally feel that your accounting numbers are squishy and vague because of problems you had in estimating the accruals behind them.
Another way of looking at this is to ask why you want higher grades in your high school or university class, or a higher salary at work. It’s not necessarily because you yourself value high grades or a higher salary — maybe you are perfectly happy muddling through at school or at work because you have other important things going on in your life besides competing for higher everything. You understand, though, that other people value these things and will make decisions about you based on these measurements of your value. You therefore have to decide how you're going to behave in relationship to the opportunities that are provided to get a better grade at school or earn a raise at work.
Even if you decide that you are not going to play the game of seeking higher grades or salaries, you’ve had to make a decision, and that affects how you behave. Your social status depends on these things, so if you are not going to play the game in earnest, you must resist the game somehow by adopting an ironic detachment or moral superiority, somehow finding a niche around the game.
Whatever way you play it, you have altered your behaviour in relation to the numbers that measure you, based on how you think others will perceive and react to those numbers.
Four Social Roles of Numbers
Vollmer explains four different roles that numbers play in society, as a result of our behavioural dance around the hyperreal meanings of numbers.
The first that numbers act as sources of information. Vollmer’s point is that numbers are much more informative than financial realists presume. Remember, Vollmer is a financial pragmatist. He’s saying that numbers don't just measure an objective reality somehow stands behind them. They also reflect and discipline the behaviour of all the participants in a given field. The CFO, the salespeople, the financial analysts, the stock brokers, the investors, the union representative, the bank manager — everybody is disciplined by these numbers. Numbers therefore reflect both the anticipated behaviours and the actual behaviours of all the participants.
The phrase Vollmer uses is that it's not just money that's at stake, it's "character, reputation and livelihood." That's what makes numbers much more informative than the basic theory that financial numbers merely represent an objective economic reality.
The second role of numbers is that they serve as bases of action. Here he's drawing on Bruno Latour again, who argues that numbers are used to draw information from the peripheral regions of an organization or of a country or of an empire, towards a center of calculation. A specific example: regional sales forces are measured based on their sales, and that sales information is transmitted to the center, to head office, where decisions are made about what products to advertise and which sales persons get bonuses or promotions. What we have to keep in mind here is that, although this is a very concrete power relationship where head office gets to define what gets measured and how the numbers are going to be fed into decision-making processes, these measurements provide the people who are being observed with a means of expression. They get to decide how to react in relation to the process of measurement and the use to which those numbers are put. As another French social theorist, Michel Foucault, puts it, power is relational. There is no power without resistance. There is always pushback on the use of numbers.
The third use of numbers that Vollmer draws our attention to is the notion of embedding. What he means by this is that numbers embed the situation in which they're produced into broader social contexts.
Numbers get created and stored, and then they get reused in other situations. An example of this would be that the grade that you get in a course is stored by the school and used at a certain later point to determine whether you graduate. Another example would be that if you are working as a salesperson, your sales figures are stored and used later on to determine your bonus.
From a specific and concrete situation, where you are sitting face to face with a customer trying to make a sale, numbers are abstracted and stored and then used in a different social context, which is your employment relationship with the firm. The numbers that arise from that social context, such as your annual income, are abstracted and stored and later reused at a bank when a loan officer is deciding whether you qualify for a mortgage. This is embedding the social reality of your meeting with the customer in a very distant and different social context.
The fourth role of numbers is that they act as social resources. Vollmer makes a very important point here, that the ability to use numbers as social resources often depends on having a certain privilege a certain background, a certain kind of training, a certain amount of wealth or prestige. The capacity to draw on numbers as social resources is not evenly distributed.
Another point that Vollmer makes is that the numbers are always produced and consumed in specific social settings which give them important meanings that may not translate outside those settings. Some numbers have no external significance, in and of themselves. In a basketball game, there might be a certain number of seconds you can hold onto a ball, but no one at work cares whether you hold onto the ball. At work, there may be a certain number of minutes you are allowed to use a scarce resource like a Bloomberg terminal, but at home nobody cares how many minutes you spent on it. These numbers are very important within their context but nobody else outside the class cares about them.
So, the ability to use numbers as social resources is constrained by your social capacity to use those resources, and also by the context in which you're operating.
Mannequins framed in windows at Salvador Dali House, Cadaques, Spain
Framing
Vollmer then turns our attention to the notion of framing. Here he's drawing on Erving Goffman. In accounting and finance, Vollmer argues, there's a single frame of reproduction. It's a very big frame, but it’s singular. There is only one way to legitimately produce and reproduce accounting numbers, and it is governed by the whole professional apparatus of trained accountants and trained economists and trained financiers, who all specialize in the way accounting numbers are produced and reproduced.
However, when it comes to consuming those numbers, there are multiple frames of consumption. We use numbers according to our local purposes, in ways that could not be fully anticipated by those who are involved in the frame of reproduction.
Drawing further on Goffman, Vollmer defines the two directions of movement between these frames, upkeying and downkeying. Upkeying is when you move from a concrete, specific social situation up to the single professional frame in which accounting numbers are reproduced. You do this in order to demonstrate the correctness of a number. You pop up out of your local, specific conversation to a higher frame of reference where you talk about how the numbers are calculated. This builds the veracity of those numbers, so that people accept them as correct and authoritative.
Downkeying is when you draw on those numbers that have been successfully shown to be correct, drawing them into a specific situation for some particular purpose. This is where numbers are given their meaning. Numbers don't have any meaning by themselves. They are given meaning when you draw on them in a specific and concrete social situation.
An example of this movement between frames would be if you're arguing for a raise. You say to your boss, "I deserve a raise.” You are discussing the local, concrete situation. “For the past two years,” you say, “I’ve been paid $50,000 a year, but now the cost of living has gone up 6%. I’ve been the top sales person in the store for 8 of the past 12 months. I’ve received 14 positive endorsements on social media from customers." You are upkeying to the numeric frame of reproduction, pointing to these verifiable numbers. “This proves I’m a valuable employee,” you say, “and I deserve to be paid what I’m worth.” Now you are downkeying back to the numeric frame of consumption, giving all these numbers a meaning in your concrete situation.
You are using numbers for a particular argument. If someone questions the numbers, you upkey to prove that your numbers are correct. You point to a news article about the cost of living, for instance, and if the authors of that article have done their job properly, they will themselves have pointed to the database of economic data that they used, which was prepared by trained economists. Then you downkey again, reinforced with the proven correctness of your number to drive home your point, eventually going home to your family with the happy news that you have been given a raise. Or you quit, because clearly the boss does not value you as an employee.
Either way, you have drawn on numbers and given them meaning by connecting them together, putting your existing salary together with the cost of living and the data about your job performance, using all of this to shape and support your argument. You do this in anticipation of the way your boss will react to the numbers.
It’s important to realize is that this is a collective, social activity, says Vollmer. There are teams of experts and vast institutions behind the production and reproduction of numbers. There are innumerable people using the numbers in new contexts to give them new meanings, and innumerable people changing their behaviours as a result of these meanings. Vollmer points to the dialectic relationship at play, this movement back and forth between trying to stabilize the numbers and make sure that everybody agrees about them, and trying to destabilize them by giving them a new spin or a new meaning.
And this goes on all the time, this back and forth between the stability and instability of number, between their immutability and their adaptability, between their reproduction and their use.
The Use of Numbers
The use value arising from this dialectic takes advantage of two basic characteristics of numbers. Numbers, Vollmer argues, are both calculative and symptomatic.
Numbers are calculative because they can be combined according to accepted rules: arithmetic, statistics, and so on. This is what upkeying is about, when we move into the frame of reproduction of numbers. To use numbers effectively, we need to demonstrate that the numbers we call upon are correct. We do this by arguing based on the arithmetic, statistical and financial rules that we've agreed upon.
So for instance, you're using numbers from the latest press release of a company and I'm using numbers from the company’s annual report. While your numbers are more recent, my numbers have been audited. I can argue, therefore, by upkeying into the frame reproduction of numbers, that my numbers are more trustworthy.
You can argue that your numbers are more current and therefore more relevant, but you will have to upkey into the frame of reproduction at some point to establish the validity of the numbers in the press release. Upkeying in and of itself does not provide a right answer. Upkeying is a strategic and an argumentative move to take advantage of the calculative characteristics of numbers.
The symptomatic characteristics of numbers is the idea that somehow they are symptoms or indicators of social behaviours. When you take abstracted numbers and you downkey to the frame of consumption, you are ascribing to them a certain meaning in terms of the social behaviours behind them. For instance, "Sales are down this year” is just a statement of numeric fact. “Sales are down this year because our quality has deterioriated, or because consumer preferences have changed" is ascribing meaning to the sales figure that connects it to the behaviour of our workers in the assembly plant or the behaviour of our customers in the consumer market.
This focuses on the situational meaning of numbers. The thing to recognize here is that when people are making an argument using financial numbers, they're moving back and forth, sometimes popping up to the calculative reproduction of numbers, and sometimes dropping down into the symptomatic consumption of numbers. The use of numbers is argumentative. Numbers are about persuasion.
Summary
That’s the gist of Hendrick Vollmer’s article. It helps us understand why numbers matter so much, and it helps us understand how to do more with numbers ourselves.
In this lesson, we talked about financial realism versus financial pragmatism, financial realism being the idea that the numbers represent objective reality, financial pragmatism focusing on how the numbers are actually used in practice.
We talked about the four roles of numbers: as sources of information, as bases of action, as embedding the social situation that produced them in other social settings as they are consumed, and as social resources, where people with the right skills and training can use numbers more effectively than other people.
We also talked about the framing of numbers, how you move up to the frame of reproduction or down to multiple frames of consumption that are very situation specific, in order to create convincing arguments.
And we talked about how people constantly work to stabilize or destabilize numbers, depending on the strategy of their argument, taking advantage of the calculative and the symptomatic characteristics of numbers.
I want you to think about how financial numbers are reproduced and consumed in, for instance, the MD&A of the annual reports you are looking at, or a news story on the funding of public transit. Pay attention to the strategies that people use as they're drawing on financial accounting numbers to try to advance their argument.
Congratulations!
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Title photo: the numbers row of my keyboard