Managing Essentials

International In the time of prognoses mind the processes

In the early days of the year fitness studios worldwide are overwhelmed by new members, employees arrive more punctually at work despite wintery weather and alcohol and cigarette shops have a hard time. The New Years resolutions made just a few weeks ago reflect on businesses. As individual as these resolutions may have been, to improve health and discipline are universal concepts close to everyones hearts. It would be wrong however, to conclude that this year will be an especially good one for the fitness and service industries and a disaster for alcohol and tobacco producers. By April, it is certain that fitness studios will already be less crowded and those not going anymore will lie on their couches reading articles by psychologists discussing the problem of overcoming the weakness of will. Memories of opulent holiday meals fade even faster and again around April with the beginning of spring in the Western hemisphere, many will discover the need to cope with gained weight. Also the alcohol and tobacco stores will have returned to normal. The turn of the year is traditionally the time for retrospection, plans to change and prognose with regard to individual lives and the goings on of the world in general. What will 2013 bring? The first week of January is the time to publish the horoscope for the year in the yellow press and to collect expert prognoses from the more serious newspapers. The problem with prognoses is that they are regularly trivial, inaccurate or missing the most important developments in the year. This is the reason why you find many prognoses for 2013, but only rarely critical reflections on those for 2012. Looking back on what was predicted is often sobering. Even predictions for gross domestic products (GDPs), a fairly stable parameter assessed by groups of educated professional experts, vary considerably and have to be "adjusted" several times per year in most industrial countries. This is unfortunate for the GDP and in many other cases the truth does not lie in the middle range of predictions. The more specific and detailed a prognosis, the more likely it is to fail as thousands of predictions for stock market developments demonstrate. Matters become even more complicated if predictions are attempted on how specific products will fare in their markets. As the underperformance of Windows 8 or the iPhone 5 demonstrate, a solid brand name, the professionalism of an experienced company and extensive market research do not guarantee that predictions are met. Prognoses just projecting a linear trend are often not completely wrong, but they are fairly trivial. As in the case of the GDP one cannot really go wrong by doing so in most cases because comprehensive parameters like a GDP have so many stable components that only rarely does it vary by more than 10%. Comparably, it is not likely that the stock value of a big company with a broad product portfolio deeply anchored in its markets will vary more than 30%. However, countries like Greece and companies like Apple show that in some years, under exceptional circumstances. it can happen. The problem with these linear prognoses is that they are often right with regard to the direction but lack the precision needed to base policy decisions on the estimated numbers. Sometimes significant co-factors are missed. The experts of the Club of Rome soundly backed by the trends, predicted some decades ago that the world would soon be out of oil underestimating how rising prices would drive exploration and technological advancement in exploitation technologies. The most impressive prognoses are those correctly predicting an event against the wisdom of the

Managing Essentials
International
crowd, but they are rare and regularly just lucky hits. You find experts who predicted the market crash of 2008 or more singular stock market developments correctly, but it is in hindsight only. The problem is less that true gurus are not recognized as such, but that their correct predictions in hindsight do not guarantee they will be right in the future. Some formerly acclaimed geniuses of the financial markets were just running Ponzi schemes using the money of new investors to pay interest to the existing ones. All this is in principle has been known since the 1950s when Herman Kahn tried to establish the science of futurology. Out of his well funded and staffed Hudson Institute he correctly predicted many trends in the expansion and proliferation of existing technologies, but with the nascent information technology of that time, he missed the trend really shaping the future. In the decades since then humankind has learned to be more cautious when trying to look into the future. With life as usual and gradual development the rule, the possibility of technological revolutions and disruptions have to be taken into account. Disruptive innovations and technologies have gained attention since Clayton M. Christensen coined the term a decade ago. However, by their very definition the effects of such rapid developments are hard to predict and they are often caused by unique situational determinants. In sum, the reason for prognostic inaccuracies and failures is simple. Prognoses cannot be better than the understanding of the processes leading to them, and even if these processes are fairly simple, complex interactions can arise. The worldwide fitness boom at the beginning of a year is a typical example of this. There is only one basic process responsible, the weakness of will, a phenomenon known for many centuries and scientifically studied for decades. Individuals are also aware of this weakness and can often tell heartwarming stories of their problems. At certain times, like New Years Eve they try to cope with it by making resolutions for the coming year. Typically, however, the weakness of will wins out over time and ironically the strength of the resolution and its timing indicates how weak the will actually is. So it is a fairly safe prognosis that many of those signing up for fitness programs in January will be out again by April! Hopefully though, some will overcome their weakness; they will typically do this by taking other factors into account like not trying to overachieve and looking for a social setting which makes the fitness work enjoyable. These successful individuals have a better model of themselves, they consider the side effects and try to set a framework in which the short term resolution can in fact have long term positive effects. It is this good model which decides if a prognosis deserves this label or is just a wild guess based on singular arguments. It is tempting to predict aspects of the future, but the focus must be on the understanding of the processes leading to them. Possibly a flap of a butterflys wing in Brazil may set off a tornado in Texas, as eminent chaos researcher Edward N. Lorenz speculated in the 1970s. However, given the multitude of flaps it is nevertheless more helpful to look for the more proximate causes. Predictions, especially when they come around in numbers, have a tendency to obscure the lack of knowledge behind them. It is the deepening of the knowledge of underlying processes which will really help to make the year a good one.

Managing Essentials
International
Herman Kahn (1972). Things to Come: Thinking About the Seventies and Eighties. New York: MacMillan Disruptive Innovation (Clayton M. Christensen) www.managing-essentials.com/3a1 Predictability: Does the Flap of a Butterflys Wings in Brazil Set Off a Tornado in Texas? (Edward N. Lorenz,Presented before the American Association for the Advancement of Science, December 29, 1972) www.managing-essentials.com/3a2