So, what does the future hold?
Friday, 26 October, 2012 Leave a comment
…NO-ONE KNOWS! Deal with it. Move on.
It doesn’t matter whether you have a calculator or a PhD, a supercomputer and a job with a 200 year old financial institution that is a fact. So, can we PLEASE get over our prediction addiction and deal with what we are able to influence in the real world!?
Coincidentally, this morning, I read an excellent book review (Models Behaving Badly by Emanuel Derman) and I wanted to share his quote about mathematical models: “we are trying to force the ugly stepsister’s foot into Cinderella’s pretty glass slipper. It doesn’t fit without cutting off some of the essential parts.”
But here is yet another expert making the same point…
Simulations of highly dynamic natural systems have shown that models of growing complexity are moving slowly toward reasonable replications of reality: global climate modelling is a fine example of this slow, but indisputable, trend. In contrast, forecasts of interactions of social, economic, technical, and environmental developments are not going to improve by making models more complex. This is because so many critical variables determining eventual outcomes cannot be either anticipated or, when they get considered, their probabilities cannot be confidently placed within bounds narrow enough to generate a restricted fan of possible outcomes that might be used in confident decision making. Once the inherent uncertainties make the outcome fan too wide, there is little point in building more complex models: we might have obtained pretty much the same results with a small electronic calculator and the proverbial back of an envelope.
What to Do Instead
…a new century will make little difference to our ability of making point forecasts: we will spend more time and money on playing the future game—but our predictions will continue to be wrong.
But acknowledging these realities is not the same as advocating a complete abstention from looking far ahead. There is a fundamental difference between decisions that are good only if a particular prediction turns out to be correct—and the ones that are good for a range of alternative futures: scenarios, rather than point forecasts, are thus much more valuable, both from heuristic and from practical points of view. As the future is inherently unpredictable, it is the decision analysis or contingency planning under a range of alternative scenarios that should be pursued most diligently. Techniques comprising this approach range from narrative and normative scenarios to Monte Carlo simulations and to stochastic programming.
The problem is that, to make an enterprise more resilient, requires redundancy – to absorb the unforeseen or unforeseeable “shocks” from a turbulent and unpredictable economy – and this is something that the money-men struggle to cope with! That is, to some extent, understandable because the obvious questions are: what, where, how much, for how long?
When it comes to a business finance perspective the term “redundancy” has an entirely different meaning! Other familiar terms such as “lean”, just-in-time”, “outsourced” or “optimal” have similar connotations but, rather than adding resilience they tend to make a business more fragile.
Not a good position in a VUCA World