Tuesday, September 16, 2008

Forecasts vs. Scenario Planning

After reading Why Forecasts Don’t Work in Finance I felt moved to add a supportive comment, which grew. So here it is.

I absolutely agree with you that forecasting in finance rarely works and that scenario planning is more helpful. I have been using scenario planning for a long time now and find it a great way to identify and overcome peoples unconscious assumptions about the future. I read once that our baseline for what is normal is how things were when we were children and I think add to that our desire for the future to be what suits us, and it makes it very difficult for us to consider a future which is significantly different.

Talking to many people here in Ireland just before the property boom ended, when it was glaringly obvious to anyone not involved in the property market that all was not well, it was astonishing how blind we became when we have a vested interest in how the future will pan out.

The biggest problem with forecasting, is that however prescient you may be, a forecast has to be plausable to your audience in order for it to be accepted and serve any purpose. (See Paul Saffo at Long Now) So the most popular forecasts are those that continue popular trends and reverse unpopular ones. I presume this is the reason why some many economic and financial forecasts fail.

In my view, scenario planning differs from forecasting in that you are not trying to tell people what to think, only give them a wide perspective from where they can ask better questions. This leads to constructive conversations (rather than arguments over who is more likely to be right!) and more strategic thinking.

Phoebe Bright
A fan of scenario planning (obviousy!)

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