Critical thinking is the process of evaluating information to guide belief, decision, or action. Finance students and professionals are uniquely positioned to utilize critical thinking effectively and persuasively.
To understand how critical thinking is a key element of finance, imagine it is the beginning of your work day. It’s been a busy week, you have a lot of projects you are working on, and it’s important for you to be productive today.
You think about starting work, and you consider getting a cup of coffee. What course of action will you take to get a cup of coffee, and how much will that cup of coffee cost you?
Many people will answer this query with “go to (fancy coffee shop) and it will cost $5.” Some will say “I will go to (franchise donut shop) and it will cost me $1.50.” Others will say “I’ll brew my coffee here at home, so it will cost a few pennies.” Still others will say “I don’t like coffee, so I will get a glass of water instead, and it won’t cost anything.”
What’s the right answer?
As with many financial decisions, there is no single ‘right’ answer. However, the process to arrive at the answer that is right for you illustrates how critical thinking is applied in finance!
In the morning coffee example, each person applied several steps to arrive at their decision. These steps involved many elements of critical thinking:
· Creativity: what else could I drink?
· Context and background knowledge: what does coffee cost at various places?
· Financial acumen: is it worth it to me to spend $5 or $1.50 on a cup of coffee in this moment, and how does this impact my financial goals?
· Ethical and social responsibility concerns: do I agree with the coffee shop’s social and environmental actions?
Once a decision is made to buy a cup of coffee, there is a financial transaction – handing over dollars and cents to the store in exchange for the product.
Many people believe that the field of finance is focused on the that last step – the financial transaction. Certainly, the exchange of money for goods, services, investments, or securities is worthy of extensive study. And, there is no doubt that finance professionals love numbers and can devote significant time and effort to analyzing numbers!
However, the field of finance is really about all the thought process that leads to the financial transaction. Additionally, the field of finance is about the long-term implications of that transaction. Thus, the ability to communicate the context of a financial decision, as well as the long-range impact of various paths considered, is a critical capability.
Replace the morning coffee example with a company’s capital investment decision, and the process is exactly the same. Although there is (most assuredly!) quantitative analysis to consider, a manager or executive must also reflect on:
· What other options are there?
· What is the competitive environment, and strategic opportunity?
· What is the cost and long-term financial impact on the company of implementing this decision?
· Does this decision reflect the company’s mission, ethics, and values?
It is no surprise that finance professionals are experts at quantitative analysis. However, financial decisions are most successful when evaluated within the right context, and with significant consideration of alternatives and long-term impacts. Finance students and professionals are expert critical thinkers and communicators!
Professor Susan Gould Bio:
|Professor Susan Gould|
Susan worked for 20 years in corporate finance, where she prepared business valuations of privately held companies in a wide variety of industries, including natural gas, printing, construction equipment manufacturing, architecture and engineering, retail, and commodities trading. Susan specialized in representing Employee Stock Ownership Plans (ESOPs) from implementation and stock purchase through sale transactions.