The Limitations of Scenarios in an Uncertain World

How do we prepare for an uncertain future? Scenarios offer a way by describing plausible future situations, broadening our perspective and readiness for potential developments. While scenarios provide insight, it’s important to recognize their inherent limitations when dealing with uncertainty.

A scenario is a rich description of a plausible future. It’s a kind of leap into the future. For example, we might imagine “Europe in 2080”. We then study the implications of this plausible future, such as the price of a barrel of oil at $300 or $10. A scenario is not based on extrapolation but, on the contrary, on the assignment of extreme values to certain variables carefully chosen for their significant impact on what we wish to study.

The advantage of a scenario is that, on the one hand, it allows us to broaden our horizons and, on the other, it prepares us to act if the scenario becomes reality. In this sense, a scenario is like a flight simulator used to train pilots: it creates artificial but plausible conditions and allows us to train ourselves to operate under these conditions.

The use of scenarios was initiated by the American researcher Herman Kahn in the 1950s in the context of nuclear warfare. It was then famously developed within the Shell oil group by several pioneers, including the researcher Pierre Wack. One of their scenarios in the 1970s was based on oil at $300 a barrel. This work apparently enabled Shell to better manage the 1973 oil crisis, which no one had anticipated. Even today, the study of future scenarios remains a genre in its own right and is regularly published.

A scenario is not conceptually different from a forecast. The only difference is that instead of one predicted future, there are several. Unlike a prediction, however, the creator of a scenario does not take a position on these futures and their likelihood of occurring, but simply considers them plausible.

Scenarios, however, quickly reach their limits: they are often based on the evolution of a few variables, without which the complexity of the whole becomes unmanageable. Scenario building is characterized by a paradox: the more detailed the scenario, the more attractive it is, but the less realistic and therefore less likely it is, the less useful it is. Conversely, the less detailed the scenario, the less useful it will be!

Photo by Denys Nevozhai from Unsplash

What’s more, the further into the future you go, the more the number of possible variables explodes, and the more the scenario loses value. And this explosion happens very quickly – it’s the very principle of uncertainty. We must include in the scenario futures that are very difficult to imagine and make many arbitrary choices to avoid multiplying the options. For example, if we still talk about the price of oil, to imagine its evolution we would have to include all the innovations in the energy field to give ourselves a chance to be realistic: fuel cells, nuclear, solar, wind, etc. Each of these fields is an ocean of uncertainty, even in the very short term. Then there’s everything we can’t even imagine yet (radical innovations, geopolitical upheavals, consumption patterns, new discoveries, etc.) We would then have to take into account all political developments or, on the contrary, assume total political stability over the scenario horizon, which is obviously an unreasonable risk. This is one of the reasons why oil price forecasting is one of the areas where errors have been almost systematic and massive since 1973, as we saw above. It’s a graveyard for forecasters, but that doesn’t stop them from persisting.

Another limitation of scenarios is that deciding if a hypothesis is plausible is not as simple as it seems. It’s a value judgment. We may decide not to investigate a scenario that we find implausible, only to see it come true sometime later. You can choose to focus on this or that variable, leaving aside the one that really matters. Few governments had prepared for Brexit in this way. An analyst, say in the German government, who would have advised to prepare for it in spring 2016 would have been laughed at by his colleagues. Conversely, it is possible to study certain scenarios that we think are wrongly obvious. Taking oil as an example, the imminent exhaustion of our oil reserves (peak oil) has been accepted by almost everyone for at least sixty years. For sixty years now, it has been accepted that peak oil will occur in fifteen years! So while scenarios may present themselves as bold explorations of extreme futures, they often end up rooted in the current identity and mental models of their creators, and most often reflect disembodied, linear thinking and a positivist epistemology. That doesn’t mean they’re useless, but we need to be aware of their limitations.

Above all, the problem with scenarios is that they have not resolved their epistemological contradiction: in uncertainty we are faced with an infinite number of variables, and prediction is impossible. The entire scientific arsenal will never be sufficient to resolve this difficulty. The title of Peter Schwartz’s seminal work on scenario planning, The Art of the Long View: Planning for the Future in an Uncertain World, is a striking illustration of this. The entire title is a contradiction in terms: “Long view”? There’s nothing to “view” in the future because it hasn’t been written yet. “Planning for the future” is a vocabulary that reflects a predictive paradigm; planning in an uncertain world is impossible. The title is grandiloquent, but it reveals an epistemological confusion. It is not a problem of academic argumentation. It’s a fundamental contradiction that renders the proposed method sterile and its application dangerous.

In conclusion, while scenarios offer valuable tools for envisioning and preparing for possible futures, their effectiveness hinges on a keen awareness of their limitations in navigating the ever-evolving landscape of uncertainty.

📖 This article is an excerpt from my book “Welcome to Uncertainty!

🇫🇷 French version of this article here.

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