In 2017 There’s No Place for Hedgehogs When Forecasting

a1_b“A fox knows many things, but a hedgehog one important thing” (Ancient Greek poet Archilochus)

Looking into the future is one of the most important aspects of business. We all want to know the business is sustainable and so we do budgets and strategic plans to maximise the organisation’s future performance.

Just how accurate are we when forecasting? This is particularly important as upsets occur more and more frequently – last year the world was stunned by Brexit and by Donald Trump’s victory.

One researcher – Philip Tetlock – has done an enormous amount of research into why most forecasters get it wrong.  He has come up with some good suggestions as to how we can improve forecasting.

Hedgehogs versus foxes 

The philosopher Isaiah Berlin said people’s thinking falls into two categories – those who have one overriding idea and see everything through this idea (hedgehogs) and those who are flexible and will interpret events using a variety of ideas (foxes). Tetlock’s research shows foxes are much better forecasters than hedgehogs. It is better to look at predicting future events dispassionately and not try to distil it into one overall outlook.

Beware: Hedgehogs make better sound bites

Usually, the forecasters you see on TV or at seminars about 2017 are hedgehogs. Learn to recognise them so they don’t clutter your own thinking. They often say “on the one hand the Rand will improve next year” but “on the other hand if there is a ratings downgrade, the Rand will not improve”.

Tetlock’s ten commandments for good forecasters

  1. Focus on areas that are meaningful to your business and are more likely to have high probabilities of being accurate.
  1. If a problem is very difficult, break it down into what you know and what you don’t.
  1. Get the viewpoints of outsiders you respect. You can get bogged down into one way of thinking – speak to different people for a wider perspective.
  1. Stop seeing the world as black or white – you are never 100% right or 100% wrong. Start thinking in terms of probabilities and define an issue as having, say, a 60% chance of being resolved in your forecast period.
  1. Be balanced in your thinking when confronted with new data or events. Learn what is relevant and filter out the “noise”.
  1. Look for the clashing causal forces at work in each problem. As Charlie Munger (Warren Buffetts’s partner) says “I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.”
  1. Strike a balance between being too prudent or too decisive. There is risk in making quick judgments and equal risk in taking too long to get to a resolution.
  1. Acknowledge errors and learn from them.
  1. Team work is better for forecasting. Learn good perspective in managing competing ideas, constructive confrontation and asking good questions.
  1. It’s like riding a bicycle – the more you do it, the better you get.

As we move further into an age of uncertainty, understanding Tetlock’s philosophy can help your business navigate into the future.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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