FYI: Forecasts off? Sometimes they're not even close!

Why does that happen?  And what are you supposed to do when forecasts are wrong?

In business and management, the precursor of success is the planning and prediction of what "success" will look like--in the future.  Making those predictions falls, frequently, to experts in think tanks, the marketing research department of a large organization, economists, and so on.  These are the kind of people in world of business who's professional life it is to make estimates that the rest of us bank our personal fortunes and professional futures on.  When we do that, however, we sometimes do that at our own peril!

Here's the problem:  The dirty little secret is...the prediction business is really based on thepast--not the future!  And when the "past" is unworthy of pointing to the future, what seems most of the time like smart science, devolves into a guessing game.  A guessing game--most often referred to as "estimates"--predictions fraught with opportunity to get it wrong!

This is okay if the prediction mistakes are about relatively unimportant things like the weather or traffic on the way to the mall--or if the penalties for following those prediction mistakes rested solely on those making the guesses.  But that's hardly ever the case.  The rest of us are the "consumers" of those bad guesses and they pertain to a lot of important matters in our life:  our investments, housing values, the job market--hell, man-made global warming, for that matter!

Geez, come to think of it...seems like there's been a lot of wrong predictions recently! 

Well, there have been a lot of those, so the Wall Street Journal's "Number Guy," Carl Bialik wrote recently about "Recession Clouded Crystal Balls in Many Industries."  He notes that forecasts for just about everything from gas prices to advertising stumbled badly last year, as the recession delivered shocks to the economy. The spate of cloudy crystal balls highlight an uncomfortable reality about telling the future:  The reason for this bad patch of predictions--read "guesses about the future"--is not hard to explain at all:  Making good predictions are most difficult when critical, important decisions called for in periods of discontinuous change!  This means that when reality [or explanatory factors] shows "breaks" from predictable, continuous trends--the forecast model becomes broken; under these circumstances the next best prediction is not simply an incremental change from the previous known data point!  

Another way of thinking about this goes as follows: when the past and the future are different, feasibly very different--i.e., at radical inflection points on a trend line--what's predicted and what happens next [and beyond] are more often than not two different things.  The reason for that is this:  there's no meaningful basis for predicating a "guess" trend-wise on what's next.  Put a different way, the next points in the plot line point--in reality--in a completely different direction.  [One way predictors try to overcome this is to look at historical circumstances that they think might be similar in a discontinuous sense--but that really is a derivative guessing game all of its own and the subject of a different discussion!].  

That's exactly the case we all find ourselves in our personal and professional decisions these days.  Stock values are radically fluctuating, what were once trending, historically higher and higher global temperatures have plateaued and declined, sales estimates are all over the board, and so on.  This raises the question:  How does one handle this situation.  At least three pieces of advice are in order: 

[1] Don't accept the first forecast your see.  Instead, look for competing estimates of what the future holds, as accounted for by other authorities.  It's just possible that their "models" of prospective reality are substantially different.  When they are different, you know that you're venturing in to unchartered territory--and should be cautious!  On the other hand, when forecasts are same, well, that provides some--but not complete--basis for thinking that extant forecasts might be instructive.  

[2] Work to erect your own estimate.  Here you will likely not be able to create all the pretty graphs and tables you see in front of you that are provided by professional forecasters--but don't let that keep you from making simple formulations of what causes or inhibits the reality you are trying to gauge in the next few periods.  Because so many predictions are based on the assumptions [that even smart people frequently argue about] of what produces unemployment, stock market variation, energy prices, and the list is almost endless--you as well have the ability to make sure that the way you've figured out how the world "works" is factored into a prediction of the future.  And, you know what?  Sometimes your view of reality is better than the accepted one!  

 [3] Be very cautious.  So when you see predictions about the future especially in times of discontinuous change--don't bet the personal or professional "farm" if you can avoid it--you're really beyond science and into most challenging job there is, frequently when it is most important, to see the future clearly and accurately!  

If you have any future considerations to make at a personal or professional level--and who doesn't?--you'll find Mr. Bialik's article worth the read!  I recommend it.