Will tomorrow be like today? In planning assumptions for budgeting and forecasting, most marketers believe that events of tomorrow, next week and next year will be much like this year, or years past with just slight deviation. However a review of the global and economic landscape (in a wild 2008) shows that this is a dangerous assumption. It's time we consider the life of a turkey.
It's that wonderful time of the year where leaves turn bright amber, apples hang from trees, tempting smells waft from the kitchen and families across the United States gather for the Thanksgiving holiday. To be sure, of all holiday staples for Thanksgiving, most in-home chefs won't forget the turkey.
However, this particular Thanksgiving, I'd like to bring up the parable of the turkey as told by Nassim Nicholas Taleb as a constant reminder that all business executives should always plan for the unexpected .... no matter how remote the possibility.
As detailed in "The Black Swan", Taleb asks us to consider the life of a turkey. You see, the lifecycle of most turkeys is well known to the outside observer. A turkey is born, and then fed generously everyday. For 1,000 days straight the turkey expects its morning shovel of grain, grass, acorns or shoots.
A monumental event happens to that turkey on day 1001–and we all know what that event is. Until that point of course, everything is considered "normal" by the turkey. In fact most days deviate only slightly from the norm, with maybe a few minor exceptions.
Getting back to day 1001, Taleb points out, "A turkey cannot figure out what is in store for it tomorrow based on the events of today." And Taleb notes that this is one of the key challenges with assuming tomorrow or even next year will be much like today.
Author Peter L. Bernstein often asks, "What is 'normal' anyway?" Good question.
Quantitative financial analysts, attempting to model the stock market, took heavy losses in 2008 as they assumed the past would be a relevant predictor of the future. Automobile manufacturers forecasted that demand would be similar to last year (maybe a bit less), and now many are frantically leasing space outside of key US ports to store unsold cars.
This year has seen the DOW index range between 13,000 and 8,000. And Mr. Greenspan, former Federal Reserve Chairman, said in testimony to the United States Congress in October 2008, "This crisis–has turned out to be much broader than anything I could have imagined."
What's a business executive to do?
Don't throw out the models–just yet. I have previously mentioned that modeling can be a very valuable tool for companies assessing future scenarios, determining cause and effect, and allocating scarce resources. But use caution; models are support tools that should be combined with good judgment, experience, and the input of others to effectively drive decisions.
Another avenue is to pay attention to outliers via analysis. Alberto Roldan, mentions in a post that, "(Outlier analysis) uses concepts like average, standard deviation, and Z-scores to determine whether a determined data point is abnormal in the same classification or category." Examine the outliers in your market. Are they occurring more frequently than your models predict?
A final recommendation from Taleb, "We need to start thinking of the inconceivable." Can a business executive plan and resource for every outcome? No, but Taleb reminds us while it is very difficult to discern the exact probability of significant events, "it is easy, however to get a general idea about the possibility of their occurrence."
Complacency is not your friend. There are good chances that tomorrow will vary significantly from today. Don't forget the parable of the turkey!
* Are the global financial events of 2008 simply outliers? Should we assume that things will return to a level of "normalcy"?
* Should the "extremes" be considered as you budget and forecast for the next one to three years? How are you taking the possibility of "significant events" into account?
* As we close out the end of the year, most marketers have already turned in preliminary budget requests for their next fiscal year. What key assumptions are you using to plan for next year?
* Are global markets getting more risky or less? In an unpredictable world, how are you dealing with uncertainty?
Take the first step (it's free).
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