Why Forecasts Fail. What to Do Instead WINTER 2010 VOL. 51 NO. 2 REPRINT NUMBER 51214 Spyros Makridakis, Robin M. Hogarth and Anil Gaba
WINTER 2010 MIT SLOAN MANAGEMENT REVIEW 83 COURTESY OF WIKIPEDIA/ SCANNED FROM THE GENIUS OF WILLIAM HOGARTH OR HOGARTH’S GRAPHIC WORKS IT SEEMS LIKE a long time ago in a galaxy far, far away. But in reality it was 2006, on this very planet. The entire world was booming, partly on the back of triple-A investment innovations devised by a master race of financial Jedi. And then: crash, bang, global recession. Suddenly it was all over. Triple-A turned into a euphemism for “subprime,” which itself began to translate into “toxic.” The banking Jedi were cast out with no bonuses — many into bankruptcy, takeover or nationalization. Welcome to the empire of the credit crunch. By now, it’s a story as well known as “Star Wars.” But what fascinates us about the story of the crisis is one single, often overlooked fact — that almost no one saw it coming: none of the experts, none of The field of forecasting has advanced significantly in recent years. But managers need to learn from history about what they can and cannot predict, and develop plans that are sensitive to surprises. BY SPYROS MAKRIDAKIS, ROBIN M. HOGARTH AND ANIL GABA F O R E C A S T I N G THE LEADING QUESTION How can managers use forecasting tools to plan effectively and build better strategies? FINDINGS X In most areas of business, accurate forecasting is not possible. Future uncertainty is much greater than most managers acknowledge. X Statistical regularity does not imply predictability. X Instead of seeking predictability, managers should channel their efforts into being prepared for different contingencies. Why Forecasts Fail. What to Do Instead As Hogarth showed in 1720 after the South Sea Bubble, people have always expected forecasters to protect them. And forecasters have always been punished for it.
84 MIT SLOAN MANAGEMENT REVIEW WINTER 2010 SLOANREVIEW.MIT.EDU F O R E C A S T I N G the academics, none of the politicians and, as far as we know, none of the banking CEOs. So we think it’s time for business experts and practitioners to come to terms with the reality, harsh as it is, that accurate forecasts simply aren’t possible in their world. (See “About the Research.”) In addition to highlighting that alarming point, we’d like to offer some solace in the form of an analogy with natural disasters. We’ll also use our earthquake and hurricane comparisons to examine two types of uncertainty. Finally, we’ll provide a framework for making decisions, plans and strategies in the absence of accurate forecasts. Fundamentally, we believe that business needs a whole new attitude toward the future. A Brief History of Prediction in the Social Sciences To understand our fascination with the shortcom- ings of prediction, we invite you to travel back in time to an episode that occurred in our world of business school academia in the 1970s and 1980s. At that time, business professors and other social sci-
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