Why Forecasts Fail and how do Scientists handle it?

Research showing that while people may be quite aware that rare events can occur, and may even be able to imagine several examples, they consistently underestimate the probability of at least one such event (including the ones they didn’t imagine) occurring. In other words, we tend to underestimate the size of the rare events. And that can lead to serious, sometimes mortal errors. What is even more disturbing is that as business leaders we continue to treat them with monikers like ‘Black swan event’ or ‘Statistically unpredictable event’ rather than preparing our companies to handle such events.

Because the only thing certain is that they will happen.

In an article in MIT Management review in 2010, we learned that the intensity and frequency of earthquakes exhibit remarkably consistent patterns. In any given year there are roughly 134 earthquakes worldwide measuring 6.0 to 6.9 on the Richter scale, with approximately 17 having a value of 7.0 to 7.9 and one having an 8.0 or above.

However, this statistical regularity doesn’t equal predictability.

Based on historical data, scientists can say with reasonable confidence that the next 35 years will bring about 44 earthquakes with intensities of 7.5 to 7.6 on the Richter scale. There are places more prone to earthquakes, but still, seismologists don’t know when or where they’ll occur.

Scientists accept that it’s impossible to predict the timing and location of large earthquakes.

So what do they do?

They do not spend billions of dollars trying to forecast the date and time, location and magnitude of the earthquake.

They prepare for the earthquakes.

Now let’s compare what we as businesses do when faced with uncertainty. We spend billions of dollars to force certainty on uncertainty rather than building the capability to react to different scenarios.