Classical forecasting and business planning rooted in the past. A definite replacement yet. In September 2008, the international monetary Fund released a forecast of world economy development for the next five years. A few days before the collapse of Lehman Brothers the Fund's experts believed that "the prospects of the U.S. economy has improved" and should wait for the GDP growth on average at 5% per year.
After a few days, the world media called this projection the biggest mistake in the world of modern projection. Experts are unable to predict the emerging crisis.
The last straw
This error is one of many and perhaps the most famous — was the last straw. It has resulted in funds and organizations that are engaged in forecasting and modeling, have lost not only the confidence of the population and businesses, but the majority of the funding. According to the Intelligence Advanced Research Projects Activity, from 2009 to 2012 contributions to forecasting in advanced economies fell by 40%. Suffered most of all traditional institutions, such as Harvard or Berkeley, which based its predictions on the opinions of respected academics. But some centers, for example, the Brookings Institution, continued to receive subsidies. They managed to convince the public that the forecasts are more accurate as the forecasting process they use not only the opinions of scholars, but modern computing technology.
However, their services are needed less and less companies and government agencies. The main reason is the rapid change of pace of life in the world. According to Bloomberg, if the earlier event that had a major impact on stock prices, occurred every three or four days, now this term was reduced to one to two days. And in the future "rate of change" can reach several hours.
As a result, even the most authoritative predictions are outdated immediately after they are announced. Thus, according to the Warren Rebeca of the American analytical center RAND, people still can't live without projections and assumptions. So now, many research institutions are looking for new methods of forecasting, while economists have begun to turn to fortune-tellers.
According to Alan Greenspan, the Chairman of the fed in the years 1987-2006, the global economic crisis is an existential failure of the whole theory of mathematical modeling that prevailed in the world since the great depression. And the main reason of this crisis was unaccounted for factor of "irrational behavior" of consumers. Because of which, in the case of the crisis of 2008, the collapse of one Bank to the verge of collapse the entire system.
Leading economists and policymakers had to make the effort to at least partially regain the trust of its citizens to what they're doing. So, before you start investment in the American economy in 2010, President Barack Obama and fed Chairman Ben Bernanke had more than two months to convince members of Congress that the program would work. And only because of the threat of the beginning of the recession, American politicians agreed. And the citizens of the States did not believe in the success of these investments until 2013, when the unemployment rate for the first time since the crisis went down.
But even introducing this program, which included investments in the U.S. economy over $200 billion, the fed admitted that do not have clear predictions of how it will behave in the economy. They acted based on the circumstances. Bernanke later admitted that often the events changed so quickly that adjust the program had almost daily.
The same situation exists now with the policy of "quantitative easing". Washington has already bought government bonds for $85 billion, and now we need to know when to halt this process. If too late — it can be too quickly to disperse inflation. If you are in hurry — the economy will again go into recession.
"Earlier, the government ordered us a prognosis, but now they prefer to respond to events that has already happened," says Vorenus Robek. In his opinion, now the world Central banks decided to postpone modeling and forecasting to the side. Even in the competition for the new head of the fed between Larry summers and Janet Yellen are against Yellen, which is considered less prone to adhering to forecasts and scenarios. Summers, who is considered to be a stronger analyst and forecaster, was not supported by the fed Board (see "Investgazeta" № 1-2, dated 20/01/2014).
The same thing is happening in geopolitics. Here the point of crisis to predict — like the erroneous forecast of the IMF sample of 2008 — became the "Arab spring". Neither in the EU nor in the USA could not predict a social explosion in the middle East, which essentially manipulated the region. After these events, as stated by the us Council on foreign relations, the Obama administration stopped listening to a long-term political forecasts. Now in the White house prefer reactions to events. For this, Barack Obama repeatedly criticized, but he did not retreat from this course.
Classical prediction — the extrapolation of what has happened previously to what is happening now, to predict the future. However, in recent years because of globalization on the development of the situation, for example, in Europe, can have an impact even minor events in the USA or South East Asia. And influence in a matter of hours. In other words, the number of significant events increases, and the frequency of "effects" — increases. In the end, the supporters of the classical forecasting simply do not have time for too fast change of events and data growth that are very difficult to handle.
In the "acceleration events" in many ways, guilty of social media and mobile Internet penetration. In acute constitutional crisis in Egypt in September 2013 news on European exchanges came every minute, but oil prices fluctuated accordingly to what was said by the leaders of parties and States about the closure of the Suez canal. The Brookings Institution has calculated that the revolution in the middle East has accelerated in comparison with the upheavals in Eastern Europe in the 1990s years in average in two times. What previously took months, now takes place over two weeks — mainly due to the rapid exchange of information in society.
Problems occurring can be easily illustrated by the amounts of information that must be considered in the global macro Outlook. For example, according to The Economist, by the beginning of last year the volume of business data has reached the size of 10 yottabytes (10 to the 24th degree of bytes). But this is cold hard facts, macro indicators and reporting on key markets. Actually for high-quality classic forecasting is necessary to use a greater volume of information. For example, the tweets of CEOs or the reaction of consumers in the network Facebook, which characterize preferences.
To process these data and projections of the company and the government more and more use of computational algorithms and less resort to the forecasts of analysts. According to experts of the Intelligence Advanced Research Projects Activity, the role of experts is more about the interpretation of certain information, which was reduced by the computer. But this approach is not always possible even for multinational companies, not to mention local business. The latter generally increasingly not agree to any of predicting, reacting to events without modeling and building plans. About such a world, writes Taleb.
If you take law firm, where the hours of work of partner costs about $800, the meeting on the current planning, which takes at least two hours, will cost $4-8 million And it's a rough calculation, not taking into account the costs of preparation, consultation and etc.
However, it's not even the cost, but the fact that no long-term corporate plan, for example, in the beginning, did not account for the growing popularity of social networks, the emergence of the online advertising market, or stagnant market desktops. In other words, the Corporation, following a long-term strategy, the same as Microsoft was "behind" the events. Whereas the most successful companies of recent years had no clear development strategy. Google and Facebook had no plan to achieve today's results when they started. It was just a good idea, combined with the correct actions of their founders.
The latter is very important. Larry page, Sergey Brin, mark Zuckerberg, and then those who succeeded them, the guide companies have used dropped them an unexpected chance to "catch" who take advantage of planning is simply impossible because it never happened before. However, they did it rather intuitive theoretical base of the futility of the classical prediction in the beginning of zero was created by the financier Nassim Taleb. In his book "the Black Swan" has been explained in detail the impossibility of accurate predictions of the consequences of some situations because of the presence of "black swans" — unpredictable events that affect the economy and does not allow to accurately predict the outcome.
Work Taleb is well known in the business environment. According to the Chairman of the Board of Directors of the Bank Elena Popova, "we live in a VUCA-world populated by "black swans". VUCA is an acronym that captures the essence of the modern world: volatility, uncertainty — the uncertainty, complexity — complexity and ambiguity —the ambiguity of General conditions and situations.
"The fact that the sales planning is useless, costly and inefficient, we realized in the second half of 2011," confirms Vena beleva, the founder of a network of confectionery "Reprise". According to her, the average business simply can not afford to waste time and resources on long-term planning and its further upgrade depending on the changes introduction. "Effectively, the planning horizon is a month, maximum 90 days," she says. Adding that the situation is monitored weekly and even daily — in order not to miss changes. This primarily relates to demand. It changes daily, and the last months are unpredictable. Given the fact that the shelf life of most products of the confectionery is about 7 hours, "negatywnie" demand even for several days may well become critical for the network. However, while the "Reprise" is unable to cope with unpredictability. About all know-how not Belev says, but, for example, many costs, from heating to electricity — in her institutions long tied to the number of visitors. The preparation of sweets from planned translated into flexible, low-demand network cope using discounts. In institutions Beleva they "work" every day from 19.00, not including individual stocks.
The international monetary Fund, the Brookings Institution, RAND, Microsoft, Google, Facebook, Delta Bank, a network of "Reprise" — all of them are forced to work in conditions of uncertainty. Everyone responds to it differently: someone replaces the analysts computing and Big Data, someone makes a bet on the search for new markets, some on a daily mo
monitoring and following the demand. Some of them, like Google or Facebook, it turns out better. Someone like Microsoft, because of inertia changes more slowly and loses market position. But all the dissimilarity thing in common: they respond to the changes. Those who fail to do so, repeat the way of Lehman Brothers.
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