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When writing scenarios, you must come to terms with the fact that the people in your scenarios will not think like you. Their assumptions on society, technology, economics and politics will come from a completely different set of data than your own. The only way to understand how the future might go, then, is to put yourself in their shoes. This is not easy, but it is the only way.

That said, this is what I heard on TV and in meetings over the last week on the subject of the future of Egyptian democracy:

Sixty-something Cold War-era Policy Guy:

Well, the “fun days” of this so-called revolution are, I’m afraid to say, now over. Now comes the real work, which the people of Egypt are scarcely accustomed to. The Muslim Brotherhood looms in the background, and who knows what the eventual policy toward Israel will be. You know, if you remember the last fifty years, these “democratic revolutions” are usually dangerous and can lead to even worse despotism. And what about regional stability? And what about the Domino Effect?

Yes, the United States has a lot to think about in the coming days.

Thirty-something Egyptian:

I was born in 1980, the year before Mubarak came to power. I have never known any other ruler but he and his secret police. My parents were always in favor of his stability and the initial promise of economic opportunity, but over time things never got any better. My parents generation, if they were lucky, had the opportunity to study in London or Paris, but we seem to be stuck with our lot here.

The only people who have opportunity are those with family connections. Between the police and the bureaucrats, nobody can afford the “baksheesh” require to start a business or find a job. We’re stuck with catering to tourists.

And if you want to speak up? My cousin spent a very, very bad weekend in the basement of the police station for daring to hand out pamphlets about a meeting where they were going to discuss a new political opposition party. He never walked the same again. And you know, he got off relatively light.

Now, fuel and food prices are increasing. The only people who don’t feel it are behind locked gates in million-dollar houses. We had very little, and now we’re losing it.

The only common denominator is Mubarak. He has to go if we are to have a future. I don’t know what lay on the other side, but I know it is time for him to go. We need to a future to live.

The kids in Egypt were not alive for the war in ’67. They weren’t present when the allegiances of Egypt went from Russia to the United States during the Cold War. They know what they know, what they have experienced, and will act from that.

Those making strategic scenarios about what happens next in the geopolitical balance would do well to ask what their assumptions would be if they were born in 1982.

One of the key elements of writing scenarios is accepting that you are describing people of the future who will most likely not share your assumptions about the world. Their society will look and act differently. Technology will solve new problems and cause new complications. They won’t be, in many ways, like you and me. This is scary, because it makes us feel obsolete and more likely to avoid the real implications of where the world is heading. Nobody likes a bracing shot of mortality with their futures work – but that’s what we get.

Don’t believe that your world will one day look foreign? Watch this group of Quebec schoolkids try to somehow fathom the bizarre world that you and I must have inhabited.

What, after all, could this strange, backward group of people been thinking to be playing with this absurdly inferior technology?

Is empire cyclical, doomed to birth, consummation, establishment, decline and desolation? Or are there other futures for large regimes? Can large complex systems create new kinds of future, or are the winds of fate far too strong? Can we predict decline, change it, improve things, create order out of chaos?

Nobody is better at exploring the large questions than Niall Ferguson. This lecture is long and well-considered, not a candidate for viral videohood. Given the subject, that is perfect.

We couldn’t love  Nassim Nicholas Taleb’s work any more here at CompFutures. His book The Black Swan has become an instant classic for its application of scenario planning to financial markets, showing us that humility and constant skepticism are our constant allies when thinking about future. His work shows us that past performance is not necessarily future reality, and that we probably aren’t as smart as we think we are when making predictions about an ultra-complex, superconnected world.

Plus, he called the financial crisis well before 2008. It’s a small group of contrarians who got that one right. (Ahem.)

For a while, Taleb was in a self-imposed media blackout, terribly weary of having expressed the same ideas time and time again about how “eternal growth” isn’t the only scenario nations and companies should expect. Black swans, he contended in endless interviews, were still on the horizon, circling with plans to challenge the orthodoxies of Keynesianism, Hayekian free markets, or any other old fashioned 20th century notions.

With the new round of economic stimulus, bailouts, and other such faith-based superstitious economic rituals, Taleb is back on the scene to discuss why, contra Krugman, debt-based stimulus packages are making us less safe, giving us growth wrapped in a dangerous package of fragility.

A wonderful, weary, frank interview.

In studies of the future, we typically define for leaders a number of potential outcomes. Obviously, nobody can be certain of the exact future, but through rigorous study of strategic trends, we can at least understand many of the major uncertainties, and plan ahead accordingly. These uncertainties are often boiled down into “scenarios,” a tool with which many people are familiar.

Scenarios must be defined and presented in a certain way if they are to inspire leaders to consider all the possibilities. There are risks if scenarios are done wrong. Present only one scenario, and the rest is considered blasphemy. Present two, and people are forced to take “sides,” both of which may be misleading. Present three scenarios, and people will usually fixate on the “moderate” scenario, even though it is no more reasonable or reliable than one with more impacts. For these reasons, we recommend no fewer than four scenarios, a broader set of uncertainties that stimulate discussion as to our course of action.

The image at right gives only one way of presenting a variety of scenarios, though probably my favorite way. The impact of these potential futures vary from mild, to wild. Note particularly the “wildcard scenario” – low probability, high impact. It probably won’t come to pass- but if it does, all bets are off. In our experience, wildcards are often discarded as too improbable to be worth the potential lost time discussing some doomsday scenario. Many executives avoid a serious consideration of wildcards, preferring to focus on scenarios with brighter upsides.

The BP spill, now in its 43rd day, is the definition of the wildcard, and the best possible argument for why they should be considered in advance.

True, planning for low-probability, high-impact events is not the quickest way to juice up revenue and profit. But it could mean the survival of the company.

Egads, Reuters has a really great set of scenarios for how the Greek crisis could play out.

Good stuff, very positive to see in major media.

We’ve been sitting back, examining the situation of sovereign debt in Europe and watching its impact on global markets.

Today, Greek debt is reduced to junk bond status, and a two-year bond’s yield has reached 26%. It was 18% yesterday.

As much as European officials say that this won’t have any systemic impact, that is often what people say when they don’t want it to have impact.

Think of multiple scenarios for this outcome. Use game theory, scenario planning, or old-fashioned guessing – but think it through.

The reason we study trends, forecasts, and scenarios is that our actions have consequences. Our decisions or lackthereof will impact the fate of nations, of men, of our ecosystem, of life itself. Small or large, immediate or delayed, our in actions in a complex system have real effect.

Take Iceland. This financial calamity is causing the first net migration of Icelanders from their island since 1887.

Anna Margret Bjoernsdottir never thought she would be forced to leave her once wealthy homeland, but after 18 months of economic upheaval she has decided to join the biggest emigration wave from Iceland in more than a century.

“I just don’t see any future here. There isn’t going to be any future in this country for the next 20 years, everything is going backwards,” lamented the 46-year-old single mother, who plans to move to Norway in June.

The cause of the upheaval is the country’s integration into a global financial structure that even New York, London and Zurich scarcely understood.

Like many other Icelanders who have seen their worlds collapse since the financial turmoil began, Bjoernsdottir’s predicament stems from the decision, on advice from her banker, to take up a loan in foreign currency.

Repayments on her loan, in yens and Swiss francs, became insurmountable after the Icelandic krona nose-dived following the banking sector implosion.

“My loans are twice as high as they were,” she said, shaking her head in disgust. “The payments keep going higher and higher, so I have to leave, I’m forced to!”

We have lived in a period of relative peace and prosperity in the West, and if we read about emigrants fleeing their home country, it’s usually from some place like Cambodia or Guatemala, a place that that has never succeeded in our First World economics. Turning the page back a few years, we see immigration from Ireland and Italy due to extreme hardship. It is hard to imagine the new home of software development companies and luxury goods returning to a state of hardship.

Then again, it’s difficult to imagine recalcitrant Icelanders leaving for the shores of Norway.

That is why we look at scenarios – because these things are possible within a lifetime.

One of our more accurate predictions at the end of 2008 was the soon-to-be-discovered catastrophe of unfunded pensions. As 2010 develops, we see that many of the current hotspots in the ill-defined “financial crisis” are tied to this one issue of having overvalued the future at the expense of the present.

California is sitting on around $500 billion (!) in liability. The state of Illinois is short $78 billion for it’s pensions. Now, here comes The New General Motors, still losing billions after a taxpayer bailout. The Government Accountability Office has recently released a report about how pensions will likely drag the ailing manufacturer down starting in 2012 or so. (h/t to Megan McArdle at The Atlantic for quality analysis here – also, the comments section is a stitch)

What happens in 2012? The bulk of the Boomers start cashing in those defined-benefit pension plans, heading to the doctor’s more often, and generally turning 65 at the rate of 7000 per day. Aren’t forecasts useful? This is why we call it a megatrend – it will impact car companies, state governments, universities, national governments, baseball teams, travel agencies – everybody.

Nothing is more dangerous than a business decision based entirely on, “sunny, bright scenarios of fantastic success at 8% returns for all of our investors, forever!”

A couple years after the world financial system quite predictably melted down, it seems some of the more mainstream journalists are becoming interested in what we call “wildcard scenarios.” Kevin Drum sat down with Reuters’ Felix Salmon and learned:

We should all be more worried about the potential of a mass casualty event — an epidemic, a gigantic earthquake, a massive hurricane, etc. — to annihilate the insurance industry and take out the rest of the financial system as a side effect. The AIDS epidemic nearly did it, Felix says, and missed only because most of its victims weren’t insured. A really big hurricane hitting Long Island could do it, though.

Yes indeed, why don’t we think more about low-probability, high-impact scenarios? It’s not because these are new concepts, oh no. Herman Kahn from RAND Corporation introduced scenario analysis in a modern context to deal with the possibility of nuclear war. He made his entire reputation by bringing leaders unwanted outcomes (notably, destroying the planet) and walking them backward (“backcasting“) toward ways to avoid negative consequences (such as everybody dying). We’ve had fifty years to absorb Kahn’s messages.

Why don’t we think more about wildcard scenarios? It’s not that they haven’t become popular in the business world. Shell’s scenario group supposedly got on the right side of the oil crisis of the 1970s and built the next forty years of success on their understanding of probable outcomes. Those responsible published heavily and built wonderful speaking careers telling others about how to think in terms of scenarios.

Heck, I even wrote a book about how anyone, from a high school kid up to a CEO, can use trend analysis, scenarios and implications for anything. Why didn’t I end up on Oprah’s couch, telling everybody how to save the world with scenario analysis? Now available to the masses in non-jargony language and using the future of beer as a case study! Fun for the whole family!

Let me ask you the reader – how prevalent is scenario thinking in your organization? How many of your senior leaders are willing to entertain the possibility – however slight and “wildcard-y” – that the world may turn out in a way that could make their decisions the wrong thing to do?

And, a better question, what percentage of executives would take such intellectual exploration – hypothetical, mind you! – as a direct challenge to their authority?

How many public relations and communications staffers would find conjecture about potential futures, turning up unfiltered on social media ,as a direct challenge to the message they are trying to craft?

These are the cultural questions of bureaucracy we in the intelligence and strategy world need to deal with before turning out anymore 1500-page analyses of potential world events. We should save the toner cartridges until we deal with how organizations actually work.

Psychologically, many are glad to have 2009 behind us. It is difficult for people to work in conditions where so much seems out of control, ready to collapse at any moment. The moment seems to have passed. The one facet of 2009 that was clear was the willingness, often at great long-term cost, for government policymakers to keep the status quo with our major institutions. For 2010 – 2020, we can use this political reality, and make more solid plans.

This is not to say that we think that everything is back to “normal.” Have a look at our strategic outlook last year on the major drivers of disruption; none of them are fundamentally different.

Disruption will continue to be the theme of 2010 -2020; those megatrends still hold. Still, the likely stability of 2010 is something you can use.

We have one lesson for clients about studying the future: Just because there is a crisis doesn’t make it a crisis for everyone. When you make solid strategies, disruption can become massive opportunity. In the past decade, the music industry has melted down. It is not a catastrophe for Apple, who launched billion-dollar devices that changed the landscape of media, and then followed up by becoming the world’s largest music retailer. The oil crisis of the 1970s took Shell to the top of the petrochemical industry. Look ahead, think differently, make bold decisions and catastrophe for some can mean success for you.

Perhaps last year many were attempting to avoid the collective catastrophe that comes when all of our institutions catch on fire at the same time. This year, choose your own success.

Earlier this week we examined how to evaluate forecasts, a skill that will be required as 2010 approaches and people get curious about 2020. Forecasts are a component of a much more useful tool, strategic scenarios. Via Zero Hedge

SocGen – Worst Case Debt Scenario

Not a happy scenario, but one you must consider:

“The November issue of Gregor.us Monthly, Coal World, has now been published and it carries an unhappy message. I am forecasting that the world will not successfully transition from oil to a broad basket of renewable energy and power sources over the next twenty years. Instead, I strongly favor an outcome in which oil, the construction fuel for the global buildout of new power generation, becomes so expensive that the world becomes energy poor, and turns instead back to coal. In case you hadn’t noticed, the process of energy impoverishment has already begun.”

Round numbered years are boom times for forecasters. There is something intellectually symmetrical about round numbers that makes people hungry for the future. Back in 2000, it was really easy to get people excited about forecasts for 2005, 2010, 2020, 2050 – all divisible by ten, mathematically elegant! There is something more confusing about analyzing trends from 2007 – 2016 than there is from looking at 2000 – 2020. The brain is a funny thing.

As we begin a new decade, you will see quite a bit of retrospective about the last ten years, and copious forecasts around the year 2020. Now is a good time for executives to brush up on their skills in evaluating forecasts, so they can critically assess what is really coming down the road. Given the high level of complexity facing our economies, this is really quite important.

Assessing forecasts is more important than the act of collecting the data itself. When you see numbers about the future in particular, we are instantly attracted to their comforting certainty. Rarely do we ask, “which assumption are packed into this trend line?” For example, take a look at this projection of potential unemployment in the United States from Q4 2009 through Q4 2020. I got this forecast from the indispensable Mike Shedlock, and he got these projections from a mix of Bureau of Labor Statistics reports and assumptions.

There is also a spreadsheet on offer “detailing” the assumptions, getting into the specifics of how many jobs might be created and when they might enter the economy.

Here’s how my analyst’s brain immediately sees this in terms of the future: I want to know what will really be HAPPENING in order to create this abstract curve. Curves like this are pure PowerPoint candy, giving us beautiful visual aids to support our discussions of the future, but the lack of explicit discussion of the future leaves us an intellectual vacuum. To really evaluate the validity of such a scenario about unemployment in the United States, we can’t leave this trend line alone – we must complicate it with all the factors that will actually go into economics in the next ten years

• Aren’t the Baby Boomers retiring during this time, or at least leaving active work?
• The Boomer “retirement” will leave a talent crisis in its wake. Will unemployment mean the same thing?
• Is there a tipping point of high employment at which American society will change and become less stable? 12%? 15%? 20%?
• What about peak oil? What if economic activity is squeezed from high energy costs?
• Which industries are assumed to create the jobs? Why will they provide more value in the next ten years?
• Does this curve assume any backlash from the Ponzi scheme meltdown of the banks? What if we crash again in 2010 or 2011?
• Will US unemployment rates roughly follow the world economy, or is this trend indicative of a shift in economic power to Asia Pacific, Europe, or Latin America?

These questions are not meant to knock down the validity of such forecasts – I’d rather have an unexamined forecast that gets us talking rather than fixate on more blather from the day’s stock market trades. More forecasts lead to more discussions and better decisions.

Hopefully 2010 will be a banner year for forecasting and strategy. If you want to more, we can recommend the book Future Inc, which dives deeper into this methodology. If you want to know even more, get in touch with us to schedule training to make your analysis more valuable to your organization.

Nokia is the poster child for futures thinking at the corporate level. They pulled off the amazing feat of transitioning their company from logging supplies, rubber boots and toilet paper over to cell phones, spurred by the transformative event of the bankruptcy of the Soviet Union. (How did they pull this off? I detail it in my book “Future Inc.”)

Finland in general, due to their somewhat obscure position in Europe and the humility of being regularly invaded by Swedes and Russians alike for centuries, has become REALLY good at foresight. Thus, it’s no surprise to see Nokia’s vision for our digital lives in 2015 laid out in beautiful graphical scenarios as in the video below.

Mark Johnson gave me the idea for this allegory for “decisions without strategic intelligence.”

It seems strangely a propos.

I’m very excited for our upcoming inaugural meeting, this Thursday of our new, increasingly global, professional society, The Intelligence Collaborative.

The following video explains what intelligence is, why we need to collaborate, and why now is the perfect moment.

Have a look at the video, and if you’re anywhere in the MidAtlantic region, consider a trip to our nation’s capital this Thursday. Tickets are free – just bring your interest in how social media will change the practice of intelligence.

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 was 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.

You may be watching with some wonderment the endless ability of the United States Government to write checks for trillions of dollars. A government already bleeding trillions of dollars is signing up to pour billions into banks, rogue counter-party insurers, car companies, people who bought too much house – all while supporting two nation-building wars and the rest of its mundane obligations like building roads and schools.

Forget the $1.75 trillion Obama will add onto the debt sinkhole of past president, just cast your eyes to what financial obligations lie ahead. Boomers. Retiring. Healthcare. I’ll stop there.

How could any government possibly pay back the interest, much less the principal, on such a debt. If you start examining the numbers, ignoring the fearsome quantity of zeros involved, you might think it will be like any average person and their credit card bill. Except, imagine that a single person has $80,000 of income, and $960,000 in credit cards – there is virtually no reasonable scenario in which the income will catch up with the monstrous debt obligations.

When it’s an individual, we call that bankruptcy. The courts step in to say, “Look, this person may have been honest about his intention to fulfill these obligations, but now we judge that it will never actually happen. And it’s neither reasonable nor moral to obligate this individual forever. All the debts are converted, it’s over.”

When a nation does the same thing, evidently it is called debt repudiation. I had never heard of this term until recently. Energy analyst Gregor MacDonald is writing about this cogently and often these days:

For example, we now know that an industrial depression will collapse tax revenues to Washington. This is already in the pipeline, as States from California to Kansas cannot even issue their own tax refunds. So the first path to repudiation comes from a collapse of GDP.

We also know that flagrant monetization will not be allowed to go on forever. That too is in the pipeline, as the FED has expanded outright non-sterilized purchases of financial assets. They have backed-stopped trillions in assets already with Treasury lending, but have since moved on to outright purchases. It’s likely that any month now they will start classical monetization of Treasuries. The FED has told us so. Thus, the second path to repudiation will come via quantitative easing, and inflation.

Let us begin to entertain scenarios in which the United States walks away from its debt obligations to China and the Middle East. Bankruptcy is a renegotiation of terms; there seems to be a decreasing chance that our financial terms of the past few decades will stand. This seems awfully dire a scenario, but I think that open-minded analysts should open themselves to what this means.