Harvard Business Review
Six rules for effective forecasting by Paul Saffo
Read the first part of this article. Choose the most suitable heading from the list below. There is one extra heading which you do not need to use.
a. ______________________________________ People at cocktail parties are always asking me for stock tips, and then they want to
know how my predictions have turned out. Their requests reveal the common but fundamentally erroneous perception that forecasters make predictions. We don't, of course: Prediction is possible only in a world in which events are preordained and no amount of action in the present can influence future outcomes. That world is the stuff of myth and superstition. The one we inhabit is quite different--little is certain, nothing is preordained, and what we do in the present affects how events unfold, often in significant, unexpected ways.
b. __________________________________________ The role of the forecaster in the real world is quite different from that of the mythical seer. Prediction is concerned with future certainty; forecasting looks at how hidden currents in the present signal possible changes in direction for companies, societies, or the world at large. Thus, the primary goal of forecasting is to identify the full range of possibilities, not a limited set of illusory certainties. Whether a specific forecast actually turns out to be accurate is only part of the picture--even a broken clock is right twice a day. Above all, the forecaster's task is to map uncertainty, for in a world where our actions in the present influence the future, uncertainty is opportunity.
c. __________________________________________ Unlike a prediction, a forecast must have a logic to it. That's what lifts forecasting out of the dark realm of superstition. The forecaster must be able to articulate and defend that logic. Moreover, the consumer of the forecast must understand enough of the forecast process and logic to make an independent assessment of its quality--and to properly account for the opportunities and risks it presents. The wise consumer of a forecast is not a trusting bystander but a participant and, above all, a critic.
d. ____________________________________________ Even after you have sorted out your forecasters from the seers and prophets, you still face the task of distinguishing good forecasts from bad, and that's where this article comes in. In the following pages, I offer a set of simple, commonsense rules that you can use as you embark on a voyage of discovery with professional forecasters. Most important, I hope to give you the tools to evaluate forecasts for yourself.
Possibilities versus certainties
Surprising developments
A likely interest
Sound rationality
Discovering the good forecasters
Which rule mentions (1 – 6)
boxes?
results you expect will happen?
a bottom line?
a decision space that is getting smaller?
traditional research habits?
a mirror used in a car?
a straight line?
new data?
liability?
an odd event?
Rule 1: Define a Cone of Uncertainty As a decision maker, you ultimately have to rely on your intuition and judgment. There's no getting around that in a world of uncertainty. But effective forecasting provides essential context that informs your intuition. It broadens your understanding by revealing overlooked possibilities and exposing unexamined assumptions regarding hoped-for outcomes. At the same time, it narrows the decision space within which you must exercise your intuition. Rule 2: Look for the S Curve Change rarely unfolds in a straight line. The most important developments typically follow the S-curve shape of a power law: Change starts slowly and incrementally, putters along quietly, and then suddenly explodes, eventually tapering off and even dropping back down. There is a tendency to overestimate the short term and underestimate the long term. Our hopes cause us to conclude that the revolution will arrive overnight. Then, when cold reality fails to conform to our inflated expectations, our disappointment leads us to conclude that the hoped-for revolution will never arrive at all--right before it does.
Rule 3: Embrace the Things That Don't Fit The novelist William Gibson once observed: "The future's already arrived. It's just not evenly distributed yet." The leading-edge line of an emerging S curve is like a string hanging down from the future, and the odd event you can't get out of your mind could be a weak signal of a distant industry-disrupting S curve just starting to gain momentum.
Because of our dislike of uncertainty and our preoccupation with the present, we tend to ignore indicators that don't fit into familiar boxes. But by definition anything that is truly new won't fit into a category that already exists. More often than not, indicators look like mere oddball curiosities or, worse, failures, and just as we dislike uncertainty, we shy away from failures and anomalies. But if you want to look for the thing that's going to come whistling in out of nowhere in the next years, look for interesting failures--smart ideas that seem to have gone nowhere. Rule 4: Hold Strong Opinions Weakly One of the biggest mistakes a forecaster--or a decision maker--can make is to over rely on one piece of seemingly strong information because it happens to reinforce the conclusion he or she has already reached.
In forecasting lots of interlocking weak information is vastly more trustworthy than a point or two of strong information. The problem is that traditional research habits are based on collecting strong information. And once researchers have gone through the long process of developing a beautiful hypothesis, they have a tendency to ignore any evidence that contradicts their conclusion.
Good forecasting is the reverse: It is a process of strong opinions, weakly held. If you must forecast, then forecast often--and be the first one to prove yourself wrong. The way to do this is to form a forecast as quickly as possible and then set out to discredit it with new data.
Rule 5: Look Back Twice as Far as You Look Forward Marshall McLuhan once observed that too often people steer their way into the future while staring into the rear-view mirror because the past is so much more comforting than the present. McLuhan was right, but used properly, our historical rear-view mirror is an extraordinarily powerful forecasting tool. The texture of past events can be used to connect the dots of present indicators and thus reliably map the future's trajectory--provided one looks back far enough. So when you look back for parallels, always look back at least twice as far as you are looking forward. Search for similar patterns, keeping in mind that history--especially recent history--rarely repeats itself directly. And don't be afraid to keep looking further back if the double interval is not enough to trigger your forecaster's informed intuition. Rule 6: Know When Not to Make a Forecast It is a peculiar human quality that we are at once fearful of--and fascinated by--change. It is embedded in our social vocabulary, as we often greet a friend with the simple salutation, "What's new?" Yet it is a liability for forecasters to have too strong a proclivity to see change, for the simple fact is that even in periods of dramatic, rapid transformation, there are vastly more elements that do not change than new things that emerge. Bottom line? Be skeptical about apparent changes, and avoid making an immediate forecast--or at least don't take any one forecast too seriously. The incoming future will wash up plenty more indicators on your beach, sooner than you think. * * * Professional forecasters are developing ever more complex and subtle tools for peering ahead—futures markets, online expert aggregations, sophisticated computer-based simulations and even, horizon-scanning software that crawls the Web looking for surprises. At the end of the day, forecasting is nothing more (nor less) than the systematic and disciplined application of common sense. The best way to make sense of what lies ahead is to forecast for yourself. Myth, prediction, superstition and forecast. Match the words with the definitions below. _______________ To estimate or calculate in advance by analysis of data.
______________ Something foretold; a prophecy.
______________ A fiction or half-truth, especially one that forms part of an
Ideology; a popular belief.
______________ A belief, practice, or rite irrationally maintained by ignorance
or by the laws of nature, or magic.