It is the beginning of the year and we need to look ahead. Forecasting is inherently a tricky business. No matter how much effort we put into it, forecasts are almost always wrong to some degree. However, some forecasts are less wrong than others, which is why it’s important to keep trying.
Years ago, while preparing for an advanced driver’s test, I learned that the most critical skill for a driver is to anticipate the road ahead. The same principle applies in business: difficult as it may be, we must think about what lies ahead.
The Challenge of Looking Ahead
Anticipating tomorrow is relatively easy—it’s likely to resemble today. But as we extend our horizons to three or five years, forecasting becomes far more difficult. What disrupts our forecasts are unforeseen events. For instance, while we can’t predict the precise timing of a pandemic, wars, or other global upheavals, we can recognise their potential to affect our business. By contemplating these disruptions, we position ourselves to respond more effectively when they occur.
Closer to home, the more immediate scenarios we must consider involve our competition and customers. What are competitors doing that could disrupt our business? What trends are emerging among customers and how rapidly are they evolving? While we can’t predict competitors’ actions with certainty, their history of innovation and external pressures can provide valuable clues. Similarly, observing shifts in customer behaviour can reveal whether our products or services are meeting changing needs.
The Experts’ Advice
Experts in political forecasting, such as Barbara Mellers, Philip Tetlock, and Hal Arkes, emphasise that serious consideration of the future often tempers extreme optimism or pessimism. They propose three strategies to improve forecasting:
1. Dig Deep
When someone predicts a future event, such as an impending recession, it’s crucial to ask why and how this might happen. Engaging in discussions and probing for evidence often leads to more balanced perspectives, moving beyond mere feelings or hunches.
2. Consider Alternatives
Exploring alternative scenarios reduces overconfidence in any single hypothesis. While it’s tempting to simplify the future by focusing on one likely event, real-world outcomes usually result from multiple factors. Considering diverse possibilities helps mitigate biases and enriches our understanding of the future.
3. Be Accountable
It is important that the forecast isn't simply an assembly of vague predictions but is bold enough to offer hard numbers. Knowing that one’s predictions will be scrutinised, fosters nuanced and thoughtful forecasting. Assigning probabilities to predictions clarifies thinking and forces individuals to seriously evaluate their assumptions and potential consequences if proven wrong.
Practical Applications in Business
What do these insights mean for business forecasting? They highlight the importance of realism. It might be more effective to think of forecasts as scenarios rather than precise predictions. Forecasters should:
Explain and justify assumptions.
Provide numbers but qualify with confidence intervals or ranges for the predictions.
Involve diverse perspectives in the forecasting process.
Most importantly, forecasts should be seen as tools for guidance, not guarantees of accuracy. By approaching forecasting with humility, rigor, and openness, businesses can better prepare for an uncertain future.
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