We live in a time of great uncertainty, where many predictions and strongly held beliefs have been brutally disproved by the facts, especially in the last three years. And yet, we continue to make predictions. This seems rational: we want to protect ourselves against bad surprises and prepare for the worst. But this preparation comes at a significant cost.
“The oil and natural gas on which we depend for 75 percent of our energy are running out. Global oil production can probably continue to grow for another six or eight years. But at some point, it won’t be able to grow much more. Demand will outstrip production. We have no choice.” The tone is grave. The U.S. President is addressing the nation in a speech broadcast from the Oval Office in the White House.
The President? Jimmy Carter. The date? April 21, 1977. We live in a world of predictions, and not all of them turn out to be accurate. How do we deal with it?
In The Iliad, Princess Cassandra was given the gift of prophecy by Apollo to win her favors. When he was refused, the god could not withdraw his original gift, so he ensured that though Cassandra would retain her ability to prophesy, she would never be believed. She accurately foretold the fall of Troy but was duly ignored. Greek tragedy works on a relatively simple pattern: the end is known in advance; men can do nothing about it. All they can do is flail around, but what must happen is bound to happen.
Business life, fortunately, is different. Decision-makers must constantly act by considering a number of predictions in different areas. Faced with a given prediction, they run two risks: the first, which can be called a false positive, is accept the prediction only to find out later that it did not come true. One thinks, for example, of the great panic of the year 2000, which was supposed to see computers all over the world stop working, when in fact they did not. The second risk is the false negative: refusing the prediction and finding oneself at a loss if it turns out to be true.
Accepting the prediction can be very expensive. One spends a lot of money to protect oneself from an event that eventually does not happen. Refusing the prediction saves money, but the savings can be catastrophic if the prediction turns out to be correct. When we consider human history, however, and the incredible number of predictions in all fields that have turned out to be wrong, this choice is far from irrational.
So there is a significant cost to accepting a prediction. This is important because we live in an era which, despite the very high uncertainty and the multiple surprises we have experienced in the last three years, retains a strong predilection for predictions, some of them apocalyptic. Protecting against these predicted outcomes represents not only a significant direct cost, but also an opportunity cost: the expenditure (of money, energy, attention) could have been more productive elsewhere than in protecting against an unproven risk.
However, there is an important difference with the Greek tragedy, which is that we often have an influence on the reality of the prediction. Of course, if a meteorite is predicted to fall on us, there is not much we can do. But in many areas, we have a capacity to act that can modify the validity of the prediction. In other words, and unlike for the Greeks, the moment a prediction is formulated, it stops being an inevitable end; it becomes a piece of information that influences our decision. This can lead to a self-fulfilling prophecy: if a shortage of mustard is announced, everyone rushes to buy mustard, which indeed leads to a shortage. But it can also distort the prediction. The energy shortage announced for this winter is currently leading to a very large effort, especially by businesses, to reduce their consumption, which may prevent a shortage in the end.
This is how our actions can make a prediction ultimately false. This does not mean that it was useless in the first place; by its existence, it may have prompted action to avoid it. To take the Y2K example again, we will never really know if the danger was not real, in which case all these efforts were made for nothing, or if it is on the contrary these efforts that allowed us to avoid the bug.
Betting on optimism
One thing is sure: except in the strictly physical world, like the meteorite mentioned above, there are very few predictions that we are not able to prove wrong by our actions. Of course, we are never certain to succeed. But as the British historian and statesman Thomas Macaulay observed, “On what principle, when we have nothing but improvement behind us, should we expect nothing but deterioration before us?” In other words, to think that we can make the darkest predictions lie is a rational choice, at least more rational than to give up and consider the predicted future as inevitable. This rational choice is that of entrepreneurship and innovation.
➕ On the topic of uncertainty, see my previous articles: In the face of uncertainty, what can you control?; In the face of uncertainty, be vulnerable; Does uncertainty mean we live in a post-strategy world?
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A way to improve predictions is using scenario analysis. See my paper together with Avi Meshulach – https://www.tandfonline.com/doi/full/10.1080/08850607.2020.1793600
Yes but never forget that scenarios are a projection of who you are and what you believe. Hence they are mostly the product of your mental models, however “objective” we want them to be.
You are right. However, unfortunately real scenario analysis is not done enough. It is more complicated. See our paper (the link above).