I wonder though, whether a prediction market on the same topic would come up looking prescient... or foolish? This attempt from 2007 looks like the answer to the question, "What if they declared a prediction market and nobody came?" Maybe I missed something, but I don't think so.
The almost unprecedented state of solar phenomena at the moment, the
increasing dependency of the world on various kinds of satellites and
the wide range of predictions would suggest it might be worth giving
prediction markets another try. (I can find no other prediction markets
on this, either active or defunct.)
Interestingly, this hefty pdf document, from 1996, pegged the market for space environment predictions at $100M and expected it to double in size by 1999 (see p. 29, aka 189 according to the document footers). Anyone have any idea how big it is now? Even 1% of that would be fine. :)
This scary piece on the same subject might lead some to wisely consider scenario thinking for business continuity and resilience as useful complments. Sometimes the unprecedented simply... happens, at which point the question quickly turns from prediction to how to cope and thrive in the messy, uncharted aftermath.
...2009 budgets... have already been consigned to the shredder, as the economic crisis has blown away the assumptions on which they were based.
Faced with exceptionally volatile business conditions, senior executives are finding it harder than ever to gauge how their companies are likely to fare in the months ahead...
With even short-term horizons as obscure as the San Francisco skyline during a summer fog, companies are finding their standard budgeting and forecasting of little use. The usual trick of plugging figures from operating units into spreadsheets appeals to number-crunchers, but can often generate misleading targets, especially when conditions change fast. [link and emphasis added]
...the first guy hits a fog bank and can't see squat. He taps his
brakes. The second guy sees red lights and fog coming up fast and taps
his brakes just a little bit harder, and so on. In just a few seconds,
hundreds of cars end up in a tangled heap and people die.
The issue is not the fog itself. Sitting inside watching it with a warm cup of tea connotes a sense of calm introspection amidst muffled sounds and soft light. Rather, the issue is moving through it, i.e., a mismatch between conditions, terrain and speed.
As I've told each of my teenage daughters: speed-limit signs, lateness, adrenaline and energetic music are poor indicators of what will work to get them from point A to point B as fast as possible in a snowstorm at night.
The risk of serious mishap must play a part in gauging what "as fast as possible" means (as the teenage son of a friend learned on St. Patrick's Day when a drunk driver hit him -- thankfully all are OK, it seems). Speed must be matched to what is actually going on, not to some idealized, wishful, outdated view of what should be.
So am I wagging a fatherly finger at managers, advising them to curtail expectations, slow down and wait for the fog to lift? Not necessarily. Here's the big thought to chew on:
Instead of turning up the headlights of forecasting (counter-intuitively deadly in fog), the most important adaptation executives and strategic planners can make to such conditions is to increase collective responsiveness.
How does one do that under conditions analogous to heavy fog when landing the plane or pulling over aren't viable options? And what does that metaphor mean in practice? Several things.
Easy? No. Formulaic? Not at all. In fact, the process is highly creative. Effective? In the current environment, conventional 'steady-state' planning alternatives are actively misleading (i.e., more of the same will only get you in trouble faster). Turn up the headlights and you'll be blinded. Slow to a crawl and you'll be passed or hit.
Citigroup officials have decided they need to reckon with a range of scenarios that were unthinkable only weeks ago.
It neatly captures the essence of why it is vital for scenario thinking to be cultivated as a natural part of an organization's analytical culture, and to become an accepted aspect of ongoing corporate dialogue, and why the term 'scenario' is often maligned and misused.
Two simple ideas: 1) It's hard to think as clearly or creatively when an 18-wheeler is bearing down on you as when it's not, and 2) calling something unthinkable is... unthoughtful. I'll deal with the first point here and second point more extensively in another post.
Studies of cops under stress bear out the fact that fear and adrenaline reduce or even shut down one's ability to access key higher brain functions, including one's peripheral vision and other sensory input. They don't do much for collaboration or listening skills either. A group's thinking may appear to get more expansive under such circumstances; that's typically an illusion.
Ideas long held close to the vest (because others would have thought them crazy) are suddenly poured out on the table in a torrent of collective logorrhea. By definition they are not pro-active, nor have they had time to ripen. It's an environment conducive to the green and rotten ideas becoming indiscriminately co-mingled with the good and timely ones.
Some might be tempted to reply with Boswell's reporting of Samuel Johnson's famous quip, "Depend upon it, Sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully." (September 19, 1777, p. 351, Volume III of 'The Life of Samuel Johnson"; often misquoted as 'being hanged in the morning'.) It's a quote I love and have used often.
Yet the frame for that quote involves a man already devoid of attractive options (other than prayer, perhaps). He's done. The only mystery is what kind of scene he will make as he leaves the picture and what lessons others will draw from it. The value of having thought steadily, wisely and creatively about a broad array of alternatives years in advance of one's crime, trial, conviction and sentencing doesn't even enter the picture.
Laser-like tactical concentration under extreme stress is very different from the calm, disciplined thoughtfulness and habituated creative behaviors (either corporate or individual) that can help steer clear of circumstances that might lead to one staring death in the face. They make so-called 'unthinkable' futures far less surprising and lead to better responses.
Better choice: create an environment in which 'unthinkable' futures and strategic options for addressing them are systematically thought-out by groups of key managers and executives and carefully positioned in relation to one another (and to the present state) within a detailed, event-based hypothetical cartography. Such scenario maps make it far easier to avoid being surprised by the kinds of dire circumstances Citi and others face today -- or that Johnson spoke about 231 years ago.
How does one reduce the chances of an 18-wheeler bearing down with little room to maneuver? Use a map to figure out where the sidewalks are. Don't walk on exit ramps after dark with your back to traffic. Don't make a desperate, instinctive lunge for the bushes and call the choice of thorns or poison ivy 'scenarios'.
It is actually possible not so see something that is really there... We can’t see patterns that our brains have filtered out... But although the risk hunters saw no danger as they stared into the seemingly benign financial jungle, in retrospect, there were certain signs — whose significance was not realized then — that should have sounded the alarm about the crisis that is now upon us...
The signs were there, but they couldn’t interpret them, even when strange and unusual things were happening. Part of the problem with grasping the significance of the anomalies was that the risk hunters were prisoners of their analytic models. What cues they picked up were interpreted in the context of their mental frameworks. They “saw” through the prism of their models. And their models did not account for the existence of the monster that was now closing in on them...
The scenario work I've done with clients for years is rooted in precisely the precept Fernandez begins with: that the mental models or frameworks that people build up over a lifetime, a career and/or a role strongly color what they believe is possible and therefore the kinds of potential problems and opportunities they are willing to consider. I mean literally color. Fernandez' analogies to invisible spectra are apt. It's not that the spectra aren't there. It's just that I'm not equipped to see ultraviolet, infrared or to hear a dog whistle.
I should note that, while the Economist article is about 'seeing' risk, the concept applies equally well to innovation. More on that in future posts. It's where I've been spending most of my time and energy recently.
Mental models are seldom examined. You and I may talk
about our views on particular future events, but it takes a lot of time
and effort (plus a common 'language' for discussing it) to talk in
terms of entire models. And mental models that are not examined and
described -- at any level -- tend to lead to decisions that don't fit
reality. (Think blindfolded child attempting to hit the party pinata
and hitting grandma instead).
Mental models are also fractal. My own colors the decisions I make, but
I also go about my day constrained, to a greater or lesser degree by
the mental models of the groups to which I belong (family, company,
church, country, etc.)
I'm reluctant to conclude that individuals' mental models are always able to change faster than those of groups. (We all know some stubborn stick-in-the-mud; perhaps he's the one staring at us in the mirror). Anecdotally, however, I know of more individuals who have had a 'Damascus-road' 180-degree 'a-ha!', 'boy I've been stupid, haven't I?' moment in some part of their lives than I do larger groups or companies that have done the same. (When that does happen, e.g., Bill Gates' famous 'Internet' memo ten or so years ago, it tends to be just a powerful individual who changed his mind, not evidence of the group turning quickly together.)
Finally, mental models not challenged systematically and fundamentally on a pro-active basis (e.g., with scenarios) tend to change only defensively and slowly (in response to hard, external truths; often at great cost). That's painful. As Fernandez writes:
I wonder to what extent the policy reaction to the current financial crisis is still colored by the limitations of received wisdom — the financial models — and the need to keep the music playing. The interventionary mechanisms of the last few weeks are designed to fix problems as we understand them. If you’re convinced we understand things now. At any rate we are firing into the last known position of the monster. Nothing can withstand that firepower. The crowds are being told not to worry because the monster will soon be dead. True, there are few doubting souls who are worried that the creature may actually be feeding off our weapons, but their fears are dismissed as nonsense. The important thing, we are told, is to keep things going, which was just the advice the traders gave the risk managers.
is remarkable how the advent of the current financial crisis
structurally resembles the intelligence failures leading up to 9/11:
the same misinterpretation of warning signs, the same blindness to
threats now evident in retrospect. The same belief in a rapid
resolution and a belief that the normal would soon be back.
In other words, we all sense that things have changed fundamentally (in financial markets and geopolitics) but we probably won't be able to develop our new mental models (at least collectively, agreeing on which ones are 'real') for many years -- not without a lot of deliberate thought-work, that is. Nor will we be able to perceive ongoing change properly (assessing both direction and magnitude) or develop said models in a way that enables us to act with precision, resolve and clarity. For years. That's a bit scary. It's also humbling (at least it should be).
Here's another thought that I should probably 'unpack' more fully in another post. Mental models are reflected in, but
less often challenged by analytical tools. Oh sure, insights can most definitely be had with them, but I'm talking about much bigger constructs. Sophisticated computer models, for the most part, tend to only amplify the force and reach of our brains.
They do not, as a general rule, make them better able to 'think
different' (ly) and develop new mental models for seeing the world -- for assessing the big risks in truly complex adaptive systems or for finding innovations.
...a little-known tool of the insurance world: Computerized catastrophe modeling. Crafted by several independent firms and used by most insurers, so-called cat models rely on complex data to estimate probable losses from hurricanes.
But regulators and other critics contend that the latest cat models -- which include assumptions about various climate changes -- are triggering higher insurance rates.
Starting in the early 1990s, cat models began to replace the industry's older tools. Previously, insurers based their rates and underwriting policies largely on historical records of past claims.
Never mind if the forecasts are accurate or not. They work. To increase profits. That's not a pejorative statement as far as the insurance companies are concerned. It's their fiduciary responsibility to maximize return for their shareholders by any legal means available. It does however, set up an interesting, albeit very long-term test of the credulity and patience of their customers. I.e., should the forecasts prove inaccurate. More from the WSJ piece [emphasis added]:
Underlying the newer cat models are scientific theories that rising sea temperatures will result in more intense, and possibly more frequent, hurricanes. The hypotheses suggest that catastrophic hurricanes like 2005's Rita, Wilma and Katrina weren't an aberration, but rather the shape of things to come. Large reinsurance companies... were early converts to theories of global warming and cite warming of the earth's oceans when predicting massive damages from future storms.
Well of course they were! Think about it for a second.
You're the CEO of a big reinsurance company. Two scientists walk into your office. One says he's got a new computer model that predicts big future costs due to storms.
"Of course I may be wrong," says scientists number one, "After all, I'm a scientist. We deal in hypotheses. You're the executive. You need to make the call on what to do with this." "So let me get this straight", says the CEO. "If your models are right, we get to raise our rates because our competitors, customers, regulators and the general public
are all looking at the same stuff, convinced that your predictions are true? Is that what you're saying?"
Hmm, she thinks to herself (the CEO). This is pretty good. If this guy is wrong, we get to pocket the difference for decades. It would take that long for anyone to prove this guy wrong. Even better, it's not that hard a sell to the general public. We've got cover. If he's right, well... we'll keep him on retainer. Keep his firm in good shape. Drop them some plum projects to keep 'em happy... maybe even kick this over to mar-com to manage. Under that scenario, we've at least got a decent business until I retire -- no better or worse than before. All upside. No downside. Suhweet!
The CEO smiles. She turns to scientist number two. "And what do you have to say for yourself?" she asks.
"Um...", stammers scientist number two (a geologist by training), "...the fossil record over several million years, and agricultural evidence over several millennia would tend to suggest that storm activity actually decreases during warmer climatic periods. And we're just getting this new data in from deep ocean probes suggesting that 80-90% of the ocean volume is staying the same temperature or maybe getting colder. It would be a bit hasty, in my opinion, for you to raise your rates based on a set of theories and prospective models that claim precise predictability when what we're really dealing with here is massive uncertainty. If you just sign the proposal we put on your desk to study this a little further, we can refine the numbers..." "Thanks for your advice", asks the CEO. "I'll look into it. Have a nice day."
That's a fantasy dialogue, obviously. Read the WSJ article and draw your own conclusions [emphasis added]:
Perhaps the most prominent critic to surface is Karen Clark, an economist who founded one of the first cat-modeling firms two decades ago. Today, she warns about the programs' misapplication...
Companies that rely too heavily on cat-model data "are subjecting their businesses and their customers to the volatility of computer models," says Ms. Clark, who now runs a Boston cat-model consulting business. "The models are being used as if they produce definitive answers rather than uncertain estimates." Ms. Clark says she advises clients to use them in conjunction with other factors, such as broad historical data.
To be sure, insurers themselves are facing higher rates from the reinsurance companies that backstop their claims. The reinsurers, and the financial ratings agencies that assess the health of carriers, are also using the controversial newer models.
I just love this last bit:
...some models now attempt to estimate future losses over a shorter period of time. In doing so, they may also use selective historical data. One model, for example, was reprogrammed to give greater weight to years in which ocean temperatures were particularly warm and hurricane rates were high, such as the period from 1930 to 1945 [prior to broad industrialization and CO2 increases]. That particular model resulted in higher loss estimates for the near-term.
...and therefore higher rates. The logic is circular.
With air travel on my mind after a West Coast trip last weekend, the following strikes me as positive, (and not just because I'm a marathon runner who tends to pack light). Rather, it's the kind of thinking we do routinely when we help clients develop scenarios. E.g., what if industry 'A' adopted the business model of industry 'B'? Emphasis added:
Imagine two scales at the airline ticket counter, one for your bags and one for you. The price of a ticket depends upon the weight of both.
That may not be so far-fetched.
"You listen to the airline CEOs, and nothing is beyond their imagination," said David Castelveter, a spokesman for the Air Transport Association, a Washington, D.C.-based trade group. "They have already begun to think exotically..."
With fuel costs almost tripling since 2000, now accounting for as much as 40 percent of operating expenses at some carriers, according to the ATA, airlines are cutting costs and raising revenue in ways that once were unthinkable...
Singapore Airlines... is "trying to eliminate unnecessary quantities of extra water" to save weight, Chief Executive Officer Chew Choon Seng said in an interview...
Robert Mann, head of R.W. Mann & Co., an aviation consultant based in Port Washington, New York [said,] "If you look at the air-freight business, that's the way they've always done it... We're getting treated like air freight when we travel by airlines, anyway."
This signals that an industry long characterized by minimal innovation starting to think beyond convention (but... we've always done it that way!) The shock is external and pressing in this case (fuel costs). It needn't be so. Better to do this kind of thinking every day.
Best-practice use of scenarios involves doing this systematically, comprehensively and, over time, making it an ingrained habit of strategic thinking among management. (How could we change the rules to our advantage?) Having several contingent strategies already fully 'baked' when a crisis hits can move one ahead of more flat-footed competition who must do all that thinking while under existential, immediate pressure.
About ten years ago, I ran across a piece of analysis I haven't seen since and can't seem to lay hands (or search-engine bots) on at the moment. It ran in CFO Magazine and -- according to a set of accounting calculations I don't claim to fully understand -- listed hundreds of major brands whose brand value had ascended or descended the most in the preceding years. I recall such brand icons from the '70s as Peugeot and Nikon as being near the top of the latter category (i.e., the bottom of the list one would want to be on).
What was striking -- at least to this non-accountant -- was how rapidly brand values can change and by how much (many billions of dollars, in some cases).
From the standpoint of the kind of work I do helping clients to think about future strategic imperatives under a wide range of possible scenarios, the implication was clear: even if it hurt in the short term, the value of preserving (or failing to preserve) the brand could be enormous. Take that into a financing event and the advantages (and disadvantages) multiply even more, creating (or precluding) a whole range of strategic options, and so on, and so on. Brands are some of the slipperiest and yet most important assets any firm has. (The same could be said for individuals, but that's a different post.)
All of it can seem tremendously academic to companies that don't deal with consumers directly -- and tremendously obvious to companies that do... which doesn't mean that all of the latter do it well.
It all started about two years ago, when a ship carrying 4,703 shiny new Mazdas nearly sank in the Pacific. The freighter, the Cougar Ace, spent weeks bobbing on the high seas, listing at a severe 60-degree angle, before finally being righted.
The mishap created a dilemma: What to do with the cars? They had remained safely strapped down throughout the ordeal -- but no one knew for sure what damage, if any, might be caused by dangling cars at such a steep angle for so long. Might corrosive fluids seep into chambers where they don't belong? Was the Cougar Ace now full of lemons?
The Japanese car maker, controlled by Ford Motor Corp., easily could have found takers for the vehicles. Hundreds of people called about buying cheap Mazdas. Schools wanted them for auto-shop courses. Hollywood asked about using them for stunts.
Mazda turned everyone away. It worried about getting sued someday if, say, an air-bag failed to fire properly due to overexposure to salty sea air.
It also worried that scammers might find a way to spirit the cars abroad to sell as new. That happened to thousands of so-called "Katrina cars" salvaged from New Orleans' flooding three years ago. Those cars -- their electronics gone haywire and sand in the engines -- were given a paint job and unloaded in Latin America on unsuspecting buyers, damaging auto makers' reputations.
Mazda saw no easy way to guard against these outcomes. So it decided to destroy approximately $100 million worth of factory-new automobiles. "We couldn't run the risk of damaging the brand name that Mazda worked so hard over the years to develop," says Jeremy Barnes, the company's corporate-affairs director for North America.
It could be argued that a) $100M is fairly cheap to preserve (and, arguably enhance) a major brand name like Mazda (paltry in comparison with some product recalls, or lack-of-recalls that should have happened but didn't), b) it isn't even that much because both the cars and the demolition operations that Mazda had to invent and undertake were largely overed by insurance and c) it's a tremendous waste, even if it does make sense from a business perspective.
I don't agree with everything in this piece by Thomas Homer-Dixon that appeared last week in the Toronto Globe and Mail, but this quote is an absolute gem (emphasis added):
Our global financial system has become so staggeringly complex and opaque that we’ve moved
from a world of risk to a world of uncertainty. In a world of risk, we can judge dangers and opportunities
by using the best evidence at hand to estimate the probability of a particular outcome. But in a world of
uncertainty, we can’t estimate probabilities, because we don’t have any clear basis for making such a
judgment. In fact, we might not even know what the possible outcomes are. Surprises keep coming out of the blue, because we’re fundamentally ignorant of our own ignorance. We’re surrounded by unknown unknowns.
It's something I've said for a long time:
It's tempting to think that all things are predictable given enough information, enough minds, enough time and enough computing power. It's just not true. (Which is not to say that some things are not predictable... and with incredible precision... a phenomenon that leads to overestimating the scope of problems and questions that lend themselves to such methods.)
Telling which is which is the trick...
I would go even further to say that really smart people who, by life experience know that some things are fundamentally unpredictable still draw an unvoiced sense of emotional comfort in their business life from the idea that some wise expert somewhere has been to the future (for all intents and purposes) and if we could just find him or her things would be OK... and/or that a really sophisticated computer model or prediction market (the 'collective mind') can provide crystal ball-level insights.
Sometimes yes. Often, no.
I liken Mr. Homer-Dixon's observations to those tragically massive car pile-ups that happen a few times of year in fog-prone areas like the Central Valley of California. Everyone is driving along at a reasonable speed, with reasonable spacing between vehicles. People are sipping coffee, tuning radios, maybe talking on cell phones. Slightly distracted, but mostly responsible. All is normal.
Then the first guy hits a fog bank and can't see squat. He taps his brakes. The second guy sees red lights and fog coming up fast and taps his brakes just a little bit harder, and so on. In just a few seconds, hundreds of cars end up in a tangled heap and people die. All because the guy in front was convinced by every one of his senses and not without justification based on experience that the visibility on the next 100 yards of road would be the same as on the last 100 yards of road.
Prof Jean-Pierre Lehmann enumerates five different ways that can help companies to prepare for black swans - in our opinion all these lead to the critical notion of resilience. In our highly connected, nonlinear and volatile world where relatively small disturbances can combine to produce large discontinuities that result in severe disruption of business, resilience is the only possible response. Resilience has to do with the ability and capacity of the firm to withstand systemic discontinuities and adapt to new risk environments.