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A TCI Book Review

The Fortune Sellers – The Big Business of Buying and Selling Predictions

William A. Sherden
John Wiley & Sons Inc., New York, 1998, ISBN 0-471-18178-1

William Sherden is a consultant to many international corporations, and is described on the book cover as a ‘recognized expert on business forecasting’. His book is a highly readable and very entertaining exposé of the $200 billion-a-year ‘predictions industry’ which is composed of the following sectors:

  1. weather forecasting

  2. economics

  3. the stock market and financial services industry

  4. population forecasting

  5. technology forecasting

  6. futurists

  7. business planning

  8. fortune-telling

Sherden analyzes the track record of experts in the first seven of these fields (which are the province of ‘serious’ business). His conclusion: most of the forecasters are wrong.

“Each year the prediction industry showers us with $200 billion in (mostly erroneous) information. The forecasting track records for all types of experts are universally poor, whether we consider scientifically oriented professionals such as economists, demographers, meteorologists and seismologists, or psychic and astrological forecasters whose names are household words.” (p.5)

The future is mostly unforeseeable because many of the systems that are being forecast are chaotic or complex systems.

Chaotic systems are deterministic and predictable in theory – but they involve non-linear dynamics (that is, as one variable changes another changes as an exponential function of the first) and they are highly sensitive to initial conditions. As a consequence, a tiny error in an input calculation can multiply itself into an enormous difference in output. (This gives rise to what has often been termed the ‘butterfly effect’ – the notion that a butterfly flapping its wings in a South American jungle can help cause a monsoon three weeks later in Southeast Asia; in other words a tiny input can cause an incredible output.) The resulting behavior of chaotic systems is bounded (that is, it follows regular patterns and operates within certain parameters) but is practically unpredictable beyond a short period after the initial conditions are specified. The weather is a prime example of a chaotic system – forecasts are usually reasonably accurate a day or two out, but then get increasingly error-prone the further out they go.

Complex systems, on the other hand, feature a large number of interconnecting variables (involving positive and negative feedback loops), usually following an overall guiding principle of some kind. The evolution of an ecosystem over time is an example of a complex system, where the guiding principle could be thought of as ‘survival of the fittest’. Complex systems are likely to produce emergent behaviours – that is, characteristics that could not necessarily be predicted from an understanding of the system. (Think of the evolution of the duck-billed platypus, that most unlikely of animals). The behaviours of the economy and of the stock market are best thought of as complex systems in this regard. Because many of the systems that forecasters try to predict feature elements of both chaos and complexity, they are inherently unpredictable in the long run. The forecasters dilemma is further exacerbated by what Sherden calls situational bias – the tendency of forecasters to be so concerned with present trends and conditions that they cannot objectively see into the future.

The inevitable result of forecasters who are laden with situational bias trying to forecast systems that exhibit chaotic and complex features, is that the forecasts will be wide of the mark. In fact, Sherden maintains, most of the output of the ‘predictions business’ is just plain wrong, no better than results that could reasonably be ascribed to chance. In particular, forecasters are unable to see the ‘turning points’ in a trend, where the stock market peaks or bottoms out, or where business cycles will turn around. He also takes apart the technology forecasting and futurology industries, showing how most of the predictions made here have been just dead wrong (he particularly seems to have it in for Faith Popcorn in this regard), or so vague as to be essentially useless.

One amazing example he describes in the book is an analysis of economic forecasts made by 50 leading economic forecasters (looking at their forecasts for certain economic variables in the upcoming year against the actual numbers shown). The average error in variables forecast for the beginning of the year was 45%, and six months into the year it was 60%!

On the plus side he does acknowledge that there are some fields where short term predictions are reasonably accurate (weather forecasting and demographic projections are two), but even these are unpredictable in the long run due to the operation of chaotic and complex factors.

Of particular interest is Chapter 8 of the book – devoted to corporate planning (which of course has a healthy dose of the predictive element in it: if you are in situation X, and adopt strategy Y, result Z (usually increased market share) will occur). Sherden puts the various management gurus through their paces here: Porter, Waterman & Peters, the Boston Consulting Group growth-share matrix, and various others all receive their share of criticism. In the end though, and in part perhaps because this is where Sherden makes his daily bread, he suggests that these perspectives may have value, but that no single one of them should be allowed to dominate when key decisions have to be made.

The Fortune Sellers is a highly enjoyable book – Sherden writes with a very engaging style, and the book is filled with amusing anecdotes and interesting observations. The take-away message? Don’t ever trust long term forecasts – they are more likely to be wrong rather than right, and don’t trust even short term forecasts that are not based upon at least some scientific principles or sound judgment. Use common sense, and don’t bet the farm on anything.





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