Three Forecasting Traps
Meteorologists and bookies have opportunities and incentives to maintain records of their forecasting abilities. The rest of us seldom have enough carefully tracked data to adequately calibrate our minds to make reasonable estimates in the face of uncertainty. This sets us up for three estimating and forecasting traps.
- The Overconfidence Trap
Most of us are overconfident about our judgment abilities and prediction accuracy, as we remember our successes and quickly forget our errors. Our hubris tricks us into considering only a narrow range of possibilities.
Major initiatives and investments often hinge on estimate ranges. Managers who underestimate the high end (or overestimate the low end) of a crucial variable may miss attractive opportunities or expose themselves to far greater risk than ever imagined.
- The Prudence Trap
When faced with high stakes, we tend to adjust our estimates or forecasts with prudence, “just to be on the safe side.” Too much prudence can be as dangerous as too little.
- The “Recallability” Trap
Memories of dramatic events leave strong impressions on our minds and can skew future decision-making efforts.
The Antidote
Take a disciplined approach to forecasting.
- Start by considering the extremes: the low and high ends of possible value ranges. Then, challenge your estimates, as well as those of your subordinates and advisers.
- Always state your estimates honestly, and explain to anyone who will be using them that they have not been adjusted. Emphasize the need for frank input to anyone who will be supplying you with estimates. Test estimates over a reasonable range to assess their impact.
- Carefully examine all of your assumptions to ensure they’re not unduly influenced by your memory. Get actual statistics whenever possible, and avoid being guided by impressions.
