can you see into the future?
how can we reason about the unknown?
According to Charles Smithson, the financial engineering guru, "In markets as efficient as the financial markets, attempts to outpredict the market are unlikely to be successful."
He goes on to argue that "Because forecasting is thus a very unreliable means of eliminating risk, a remaining alternative is to manage the risks."
We agree with Smithson about the importance of risk management. But that doesn't mean you shouldn't even try to forecast.
The end-result itself can sometimes be valuable, because an accurate forecast may improve the quality of the plan(s) based on it. It may help identify and evaluate risks, clarifying factors and reveal assumptions.
More often it is the forecasting process that is valuable, because it sensitizes managers to change and to the relevant factors, helps them understand what is likely to occur, and builds a consensus.
Sometimes the consensus is crucial. The fact that everybody is agreed on a forecast may be more important than its accuracy. Particularly if the consensus involves many organizations or units, crossing organizational and cultural barriers.
Consensus works both ways. An agreed forecast can be self-fulfilling. But beware the self-disfulfilling prophecies!
Sometimes it is easier to forecast a ratio than an absolute figure.
|1||Set objectives for forecast - what decisions will forecast influence, and how - what aspects of plan are vulnerable to surprise - how accurate must forecast be to be of any use?|
|2||Obtain forecast - from existing sources or commissioned study.|
|3||Evaluate forecast, including assessing the sensitivity of planned actions on the accuracy of the forecast - what exactly is being forecast - what assumptions does the forecast itself make - source of forecast and past reliability - what objectives of forecasters, and how do they compare with your own?|
|4||Disseminate the forecast, persuade others of its accuracy and appropriateness.|
|extrapolation||Extend or bend a known line or curve from the past into the future. This requires some theory to decide whether to extend or bend (e.g. straight line, S-curve). Don't forget to consider trends, seasonal & cyclical variations.|
|precursor||To estimate the success of a new product, consider what happened last time we introduced this kind of product, and adust the estimate for any plausible differences. Or if historical figures are available from other firms or periods, (especially the rate of technical substitution). Use with caution.|
|Find internal or external variable(s) that is shown to be correlated to the variable for which a forecast is desired, except that the correlated variable either moves sooner, or can be measured sooner, than the desired variable.|
|Develop symbolic representation or simulation for prediction, to forecast several interrelated variables together (thus avoiding the dangers mentioned under extrapolation, above).|
|scenarios||Use alternative pictures of the future, not as fixed predictions but as frameworks for discussing future possibilities (use brainstorming, synectics, lateral thinking, ...).|
|delphi||Attempt consensus among experts by iteration of individual forecasts.|
|judgement||Choose subjectively which forecast(s) to believe.|
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|Future||Donella Meadows, Spring 1999|
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