In praise of forecasting: a series
by Eric Garland
- “It’s impossible to tell the future.”
- “Nobody could have seen this coming.”
- “ These days, things are so unpredictable, we just focus on the short-term.”
- “We have entered into a period of history of high instability – forecasting is practically impossible.”
The above are classic canards used by the media and some authority figures to argue against the intellectual exercise of thinking critically about the future. They have been used with alarming frequency since the bank meltdown of last year. The collective shrugging of the shoulders of our banks and Treasury officials was often accompanied by sighs of “How could we have know what was coming? It was all TOTALLY random. That’s just the way of the world now.” Ergo, we needn’t think hard about the possibilities of converging trends, we should just check in to be told what’s going on.
This is wrong, and it is counter to how smart leaders act. None of that has changed, bank catastrophe or not. Think about the future and you will improve it. Ignore it, and other people will create your future for you.
This week marks my tenth anniversary as a forecasting professional. I can now look back on forecasts we made a decade ago with today as the target date. Thinking about a decade of predictions, scenarios, visions and forecasts, I can say I am more excited than ever about this intellectual discipline. In short, it works, it helps, and I still recommend it to every executive on Earth.
This week, I’ll be sharing some of my favorite stories of forecasts we made in the heady days of the Dot Com Boom. If ever there was a period of irrational exuberance, that was it. And we still saw into 2010 with some clarity – enough so that I’m proud to discuss our successes and amusing failures.
15,000 visitors to the Competitive Futures Blog in August
Just checked the stats and it’s our biggest month ever on this blog – 15,000 visitors this month alone.
We’re glad you’re listening, and hope to hear from even more of you in our Disqus comments section, which can automatically link to your Twitter account.
Lots more discussion about the future to come. Enjoy the last weekend of summer!
The Do-It-Yourself Future
The vast majority of the media reported economic activity only in terms of gigantic institutions and abstract numbers. We hear about the Federal Reserve, the Treasury, and the rates they charge mega-banks to borrow imaginary money. We hear about unemployment rates, though those statistics rarely include those underemployed, running their own business, or those who don’t participate in society enough to work at a company. Then we hear about the stock market indexes, which is a tabulation of what a tiny group of gamblers in New York, Tokyo, and London were willing to hypothetically pay to own a chunk of some companies’ future earnings. (Actually, it’s not even gamblers, but computers programmed to think like gamblers.)
You may notice, that at no point have you heard about people. Your friends and neighbors and not covered by this analysis. When you provide each other child care, it doesn’t hit the books. Build a barn yourself out of lumber you purchased directly from a mill? GDP will go down. Start a foreign language club? Sorry, it’s not educational sales, and we don’t count that. Grow your own food and eat it? Sure, you may be eating delicious food and cutting your risk of heart disease and diabetes, but all you’re doing officially is taking potential revenue away from companies we measure (and tax.)
When we don’t measure this activity, it’s hard to tell when a trend is happening. When I need help getting reliable trend data, I do what every good analyst should: I go and ask my Dad.
My father still lives in our hometown of Rutland, Vermont. Yes, yes, I know you’ve been skiing nearby, and it’s quite lovely. Well, the state nearby is lovely; the town is generally on hard times. Due to a completely nihilistic policy of zero economic development, Rutland, and indeed most of Vermont has shed jobs at a terrifying rate. (One of the local heads of economic development once confided to me that what the place needed was more gift shops, “So the tourists really know we’re ‘open for business.’”) Average age of the county is around 53. The kids are gone to Boston and New York and Washington in search of work, except for those who make up our growing heroin problem. Those kids are hanging out near the collapsing downtown of boarded-up former retail space. Pretty bleak, really.
Except my Dad has never had it so good. He’s running the local farm and garden store, and after surviving an onslaught from Home Depot, Tractor Supply, and Wal-Mart (retail stores designed for MUCH larger markets) he’s having his best years ever. The reason: GARDENS. As soon as that economic disaster hit and fuel oil went through the roof, Vermonters wasted no time in getting back to their birthright of bringing up their own food in our frigid, rocky soil. Speaking as a native Vermonter, when you tell us we’re headed back to the agriculture age, threatening some scary pre-industrial nightmare, it just wasn’t that long ago for us. The last town in America to receive rural electrification was Victory, Vermont in 1967, about five miles east of where I grew up. The idea of a 19th century lifestyle is simply not that terrifying for Vermonters.
Today, despite the meeting in Jackson Hole, Wyoming declaring the whole financial crisis “over,” people in Rutland are still planting gardens, chopping logs for firewood and going back to more self-reliance. This is good news, the sign of a civilization that may not crumble over some fruity derivatives sold by financial companies that didn’t understand them either. In the end, the word economy comes from the Greek for “how you run your house.” Our major institutions sure help run the larger picture, gluing together discrete economic activity into a global picture that could ostensibly be managed. In the end, gardens are necessary and they aren’t. With all the scandal and backroom dealing and intrigue, it’s comforting to know that when push comes to shove, people can and do plant their own gardens, look after each others’ kids, build each others’ houses. The fate of central banks are not the fate of people in general. This should give cause for optimism.
You are not crazy, and forecasting works
by Eric Garland
If you watch the TeeVee Box, the world and its institutions seem inherently irrational. It’s a world of crazy risk, cataclysmic downfalls, nonsensical solutions from people who ought to know better.
One of America’s high priests, Ben Bernanke, has just been taken on for a second term at the head of the powerful and enigmatic Federal Reserve bank. See my post from yesterday to understand why this surprised me. For a moment I had the all-too-common though:
In a world this nuts, why even forecast? I mean, why study housing prices, water tables, healthcare expenditures, and all the rest if the world comes down to the actions of a select, semi-rational few.
Then I thought it over. The last year has unfolded in a strictly rational way. The trick to understanding the future (and the method I teach) is to analyze a combination of three things:
- structural trends
- actor decisions
- wildcards
Understand what’s happening, the options available to actors in a system, and the crazy stuff that can happen when you’re not looking.
Look at the economics of 2008 – 2009 through that lens and it all makes sense.
This is the subject of today’s podcast, so KEEP THINKING.
And they mock FUTURISTS for bad forecasts…
This morning I awoke to the news that Obama will be nominating Ben Bernanke for another turn at the helm of the Federal Reserve.
My only commentary would be that if you are a self-described futurist and misread the most basic economic trends for your clients, you won’t be called up for more fame and success. At some point, your bad forecasts need to call into question your methodology, and indeed, your competence.
I would say that the reason we don’t replace Bernanke despite his malpractice is that our current crop of leaders are defending our current institutions at all cost, and Bernanke plays well at that game.
Leaders need to ask themselves, do they want institutions that thrive in future realities, or ones that exist DESPITE those realities? Only our most senior leaders can make such a choice, and right now they are choosing the latter.
Cities: the real driver of future economic prosperity
For the first time ever man is becoming a majority urban creature. It’s hard to overestimate this change. Since the Fertile Crescent in 10,000 B.C., cities were only a fraction of human population, even if they were the centers of technology and culture. Humans throughout history have been mostly villagers, mountain people, hunter/gatherers.
In 1800 only 3% of humans lived in cities. Most people never saw a city, and the vast majority didn’t trust city folk when they came to town. They earned nasty terms like “city slicker” and “vilain,” which is just old French for “city slicker.”
By 1900, in the midst of the Industrial Revolution, only 6% resided in urban areas. Plenty of economic opportunity was to be had in the fields and in the mines of the countryside. Manufacturing and intellectual work still represented a minority of the jobs available.
Now in 2009, more than half of humanity lives in cities. Upward of 88% of all economic activity happens in cities – and this is increasing. Job opportunities in the countryside are disappearing as the knowledge economy makes physical capital less valuable and makes innovation the main driver of competitiveness.
Not all cities are created equal. Amsterdam, San Francisco, Singapore, Hong Kong, and Paris are monuments to culture, economic vitality, and learning, blessed by sufficient infrastructure and social stability. The urban future also means Lagos, Nigeria, Mexico D.F., Cairo, Egypt, Manila, Philippines, Calcutta, India, and more – cities of five, ten and twenty million inhabitants with critical sanitation problems, insufficient water, crumbling roads, and few jobs for the refugees from even deeper rural poverty.
For this reason Competitive Futures took a closer look at the future of what is likely to be our most common environment, the urban area. Enjoy.
We all have our reasons
We all have our reasons the future turns out a certain way.
Did we not anticipate the adoption of new technologies that would erase our competitive advantage? Yes, well you see, we had our reasons. We were amortizing old technology, and besides everybody knew that those upstart companies weren’t really serious. Yes, we’re in the red, but if you look back, we had our reasons for making those decisions. Now, let’s not get into the blame game.
Sure, we encouraged a speculative bubble in housing that has destabilized everything that uses a dollar sign: households, banks, cities, the whole national economy. But we had our reasons. GDP was increasing and people were getting monster bonuses! You can’t fool around with the genius of the market. And sure, those regulations on banks had been there since the 1930s, but as you can see, there was no way we could know they were still useful. In retrospect, you can see what we were thinking, right?
Are all the young people and businesses in our state leaving? That’s because of structural factors that are beyond our control. We didn’t necessarily encourage economic development or give reasons for the next generation of talent to stay, but that’s not actually in my job title. We can’t be held responsible for the “foot loose and fancy-free” young kids who don’t even have loyalty to us! Why are they leaving? I don’t know, but I’m sure they have their reasons…
Why did companies like Google create new ways of using information while using new, massively profitable business models? Why do some nations invest for their futures while others consign themselves to the also-rans of history?
Why do some leaders think about future trends and act early?
They have their reasons.
Real Estate: What’s Completely New, and Different From the Eighties
by Eric Garland
There are certain classic responses you will hear from people when they resist strategic ideas about the future. Let’s say that you recognize a threat to your current business and suggest a course of action. One of my all-time favorite reactions you are likely to hear is:
“We tried that once in 1980s…it didn’t work! So, you know, it can’t work now, either.”
Everything on earth, including perpetual motion machines, dividing by zero, and drinking red wine with fish w
as tried, to no avail during the 1980s by now-depressed executives. As a result, these jaded, weary bureaucratic warriors will attempt to shoot down anything that even smacks of an earlier attempt at greatness. Their tool of choice will be to compare the current strategic situation to the decade of neon and shoulder pads.
The way around this roadblock is a rigorous comparison of both strategic situations, today and yesterday. A non-aggressive way to handle this is to say, “Alright, it sounds like you learned a lot back then. Perhaps we could discuss how both situations compare?” Then you can go through all the things that have changed and see if you can unpack this person’s assumptions about their view of the future.
*Note of caution!* Some classic strategic blunders will always apply, and should be taken mostly at face value. Pay attention when you hear, “Don’t invade Afghanistan. We got the Soviets to do it in the 1980s, and it’s really nasty.” This one is true! They learned it in the 1980s, 1950s, 1920s, 1890s, 1120s, and so forth back to Alexander the Great. It’s a good bet.
*Additional note of caution!* Getting a puppy for a studio apartment, betting on stock tips from inlaws, tattooing the name of recently-met paramours on easily-visible parts of your body – you might want to avoid these mistakes as well, with or without rigorous analysis.
Now, let’s explore this technique in an economic situation rapidly unfolding before us. Many of my regular readers may be aware of the somewhat significant difficulties in the banking industry due to developments in the housing sector. (Ahem.) Everything – how do you say? – caught on fire and burned to the ground after people around the world decided that their three-bedroom ranch with a 1950s kitchen was worth EIGHTEEN MILLION DOLLARS, and then the banks developed ingenious financial instruments around this unusual state of affairs.
This you probably know. Now, if you’re a consumer of national television networks and some major print publications, then you may be hearing lots of protestations about how there’s never been a better time to buy! After all, we’ve seen it all before, especially in the boom-and-bust Eighties. (See “Scandals: Savings and Loan.”) This is a perfect time to ask whether this cycle is like the 1980s, or perhaps something new that requires new analysis and several scenarios.
My hero Mish is pumping out excellent analysis of the global economy, inexplicably free, and he came up with the following list of strategic conditions that are sharply different from just a few years ago:
- Tougher lending standards: no more liar loans, bigger down payments, closer look at incomes, etc.
- Tougher appraisal standards
- The difficulty of finding jobs
- Wage and benefit cuts shrinks affordability for those who do have a job
- Huge bank-owned shadow inventories
- Huge developer shadow inventories, especially in condos
- Consumer willingness to “walk away”
- Rising delinquencies and foreclosures due to rising unemployment
- Rising taxes
- Overleveraged consumers
- Pent-up demand to sell in a “please get me out mentality” if prices rise just a bit
- The upcoming boomer retirement downsizing event
- A change in consumer attitudes regarding housing as an investment
- A new frugality in consumer attitudes towards debt in general
This is a textbook perfect example of how to argue for a new approach to the strategic future. Seen this real estate market before, and you know for certain it’s going up? Then how do you think the overleveraging of consumers will impact the situation? What about all those empty condo towers in Florida with one family each? What about all those Boomers who were going to sell their houses anyway to move to more exciting or warmer or less busy places? What about the banks now waterlogged with houses nobody wants to buy?
You don’t want to discount people’s experience – it can sometimes be useful to hear of how the past can inform today’s decisions. It’s also acceptable to logically deconstruct the future into systems and trends (See: Future, Inc.) and to ask people if their assumptions about the future meet such demonstrably different trends at play. You may still get resistance, but at least people will be clear about where they are coming from.
Muslim demographics: what’s the real trend in Europe?
Only few hours following my post on statistics, I was sent this YouTube piece from the BBC questioning the veracity of claims in a video entitled “Muslim Demographics.” It illustrates pretty wonderfully the care we need to take in examining our biases whenever we get talking about numbers. Also, it is probably the most downloads any piece on demographics have ever received, and so I’m sure a lot of demographers are pretty excited.
Clearly, the following two videos are pretty different in their aims. The first one, viewed over 10 million times I might add, is a call to evangelical Christians to get having more babies, because demographics indicate that the whole world is going to be Muslim in a generation or so. When you hear the ominous, dark synthesizer in the background, rattling like Satan with emphysema, you get the picture quickly that this isn’t purely an objective statistical analysis. No matter – it’s attempting to tell a story, and laying out fairly clearly its assumptions for which fertility rate is “required” to sustain “a culture.” Most analyses never go this far, so it makes for a good comparison.
Now check out the riposte from the BBC. It presents another set of assumption on demographic forecasting, as well as direct interviews with demographers from the European Union. Asking experts is always an important phase of the methodology of quality futures work. They do lots of basic fact checking, too, such as the fact that Belgium’s Muslim population is 6%, not 25% – a pretty key distinction.
Key point here from the Beeb: “Population projection is an inexact science.” That’s the soul of the future – a blurry view is better than none, but the whole thing requires professionalism and an open mind.
You can believe either one of these videos you’d like, in the final analysis. The most important thing is to simply ask where statistics come from, and why these were chosen instead of others.
Numbers are just relationships
My friend and colleague August Jackson says that in most management contexts, fake numbers will win out over real logic. Pie charts sound warm and delicious, while cold hard facts sound like they are tasteless with an unpalatable texture, which is often the case. So deep is our attachment to numbers that often, we don’t even care how they were calculated or what they mean. At least statistics count as “quantifiable,” which for many is superior than common sense that lacks numbers.
And yet I love statistics, any form of abstraction that helps us understand a rapidly changing world. They often help us understand more about the analysts and what they chose to study, but it’s usually better than nothing. And when they are really useful they help us unpack dangerously inaccurate beliefs that we hold, usually from listening to media stories picked for their sensational value rather than their informational content.
Example: If you listen to the major media, you will think that the United States is at an all-time peak of violence, a cesspool of shootings and abductions and freak crimes. A quick look at statistics will show you that actually, violent crime has dropped in a statistically-significant way since 1993. News reportings of violent crime are up, but the actual numbers are down.
That’s useful to know. Now we can stop feeling like the world is out of control and that humans are getting worse, and we can start asking why our TV stations and newspapers are invested in us feeling scared. By looking at some simple statistics, our understanding of the world just got a little better. Isn’t it cool to be an analyst, and not just accept other people’s view of the world at face value?
As a competitive intelligence aficionado, this dynamic tension is my life - how do we use numbers, understand what they mean, and see beyond them, while thinking clearly and logically? It’s not easy, but it’s what makes being an analyst both an art and a science.
Not all sets of statistics are useful in helping us understand our world. I got thinking about this when the guys at Fark pointed me to this graph of the Forex for pounds sterling/US dollars under the caption “This will make it all clear.”
OK, kinda funny. What is this stuff? Is it about money? Wealth? Life getting easier or better? What will it help you predict?
This is my tension with a LOT of numbers bandied about these days, especially on the subject of the putative economic recovery.
The questions are in no short supply.
- Is the stimulus working?
- Are we seeing green shoots?
- Is the bottom in in real estate?
- What about stocks?
- When can I get back to the business of ignoring the wider world, giving money to banks, and expecting my retirement to show up when I need it?
These are all questions being asked incessantly these days. The answers are typically being given in number form. BIG number form. Well, this bank owes five trillion in derivates, so we spent two trillion in borrowed money to stimulate other numbers, especially stocks and housing prices. So, um, we know lots of you don’t have jobs and find your wages dropping, but here are some big numbers to look at to make you feel like a recovery is in the works. You want this to recover, don’t you?
Here’s the problem: I don’t really understand what a trillion is, and neither do you. Moreover, I’m pretty sure I don’t understand that Forex chart above, and for that matter I’m not sure why stocks are up.
Here’s another, bigger question: What does any of this matter? At the end of the day, these numbers are here to serve human beings, not the other way around. Their adoption less than 100 years ago was supposed to bring a scientific bent to management and make things more efficient. However, these days our statistical measures have less to do with actual human behavior than ever. Sure, perhaps they describe the behavior of a few thousand people in Manhattan, London City, and Tokyo, but they have less and less to do with people waking up, making coffee or tea, leaving the house and working with fellow humans to provide value to each other. Our statistical measures are supposed to help us better understand our relationships with one another, but they are rapidly become a self-justifying system of overcomplex gambling. We watch these numbers with baited breath, but I am less and less convinced that the return of our numbers will mean a return to a pleasant humane life.
As such, perhaps some non-statistical questions may be the only ones that suffice on the subject of the global economy. Instead of waiting for irrational and abstract statistics to show you what the world looks like, try these non-quantifiable measures:
- What kind of food are you eating? Is it good?
- Do you get to eat with friends and loved ones?
- How many hours a week are you working?
- Would you prefer to work more or less?
- How many of your family and friends are sick right now?
- Can they get the care they need?
- How often can you take part in some form of leisure activity – camping, dancing, music, polo, whatever?
- How much time will it take you to get to the beautiful space (park, museum, mountain range) near your home?
- Do you know your neighbors?
Yes, you can makes these questions into statistics, but I dare say they are less abstract than the S&P 500. They will skip the phenomenon of “numbers for numbers’ sake” and ask about how we are doing as human beings, relating to one another, even in an economic sense. So it’s not the numbers that are the problem, but the relationships they are describing.
As analysts, let’s make sure we’re trying to understand the right relationships.
About Eric Garland
Eric is one of the world's pre-eminent thoughtleaders in forecasting and strategy. He helps leaders of business and government make critical decisions about their futures.Connect with us
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