Karl Marx was correct, it seems, in predicting that capitalism would suffer recurring crises. What he seems to have overlooked is the impact of his own predictions (with companies and governments taking steps to eliminate or ameliorate the worst effects of the system), and capitalism’s adaptability. With the socialization of the means of exchange taking place in much of the western world this month, capitalism has shown that it is even willing to adopt its own antithesis in order to survive.
Archive for the 'Forecasting' Category
A key problem for forecasting demand for new products is that people keep thinking up new uses for technologies. Who would have thought, for example, that mobile phones could be used by knitters.
(Photo thanks to Not Martha)
The New Zealand-born economist, Bill Philiips, is best known for identifying an empirical relationship between a country’s inflation rate and its unemployment, the so-called Phillips curve. However, before becoming an economist, Phillips had been an engineer, and in 1949 he built one of the first models of a national economy, the MONIAC. MONIAC used flows of coloured water to represent money flows through an economy, and perhaps explains (or is a reflection of) traditional economics’ obsession with distinguishing stocks from flows.
In the 1970s, the Australian cartoonist Bruce Petty also built a physical model of a national economy, but this time with seats for several human operators, each representing The Government, The Unions, Big Business, etc. Instead of the hydraulic flows used by Phillips, Petty’s model used mechanical levers and pulleys, which impacted in convoluted ways on the machine and on the other operators. This model looked something built by Heath Robinson or Rube Goldberg, and was immense fun to watch it at work. I’ve not yet been able to find a video of Petty’s model at work.
Statistician Dennis Lindley wrote a book called “Making Decisions” which included the stunningly-arrogant sentence: “The main conclusion [of this book] is that there is essentially only one way to reach a decision sensibly.” He justifies this outrageous claim, contrary to all human experience and a moment’s reflection, by saying that, “any deviation from the precepts is liable to lead the decision-maker into procedures which are demonstrably absurd — or as we shall say, incoherent.” (page vii, second edition, 1985). There follows an account of maximum-expected utility decision theory, which is justified in the standard way using Dutch Book arguments (considerations of certain infinite gambles).
I have never trusted these Dutch Book arguments, first because we all live in a finite world, and so games in which one party is guaranteed to win after an infinitely-large time strike as games selling pie-in-the-sky. Everyone is rich eventually when investing in a Ponzi scheme, also. And second, gambling is such a socially- and culturally-embedded practice that I cannot possibly conceive how it could be used to justify decision-making procedures claiming universal validity. (For a start, to gamble you need to believe that events in the universe are not pre-determined, something which perhaps half of humanity does not currently believe.) The statistician Cosma Shalizi over at Three-Toed Sloth has a nice parody of the advice of decision-theory ideologues here:
A: Hey, you over there, the one walking! You’re doing it wrong.
B: Excuse me?
A: You’re only using two feet! You should keep at least three of your six in contact with the ground at all times.
B: …
A: Look, it’s easily proved that’s the optimal way to walk. Otherwise you’d be unstable, and if you were walking past a Dutchman he could kick one of your legs with his clogs and knock you over and then lecture you on how to make pancakes.
B: What? Why a Dutchman?
A: You can’t trust the Dutch, they’re everywhere! Besides, every time you walk it’s really just like running the gauntlet at Schiphol.
B: It is?
A: Don’t change the subject! Walking like that you’re actually sessile!
B: I don’t seem to be rooted in place…
A: It’s a technical term. Look, it’s very simple, these are all implications of the axioms of the theory of optimal walking and you’re breaking them all. I can’t get over how immobile you are, walking like that.
B: “Immobile”?
A: Well, you’re not walking properly, are you?
B: Your theory seems to assume I have six legs.
A: Yes, exactly!
B: I only have two legs. It doesn’t describe what I do at all.
A: It’s a normative theory.
B: For something with six legs.
A: Yes.
B: I have two legs. Does your theory have any advice about how to walk on two legs?
A: Could you try crawling on your hands and knees?
Anyone who has done any strategic planning or written a business case knows that planning requires one to forecast the future. If you want to assess the financial viability of some new product or company, you need to make an estimate of the likely revenues of the company, and this requires making a prognosis of the level and nature of demand for whatever it is the company plans to provide. “Taking a view on the future” is what the M&A people call this.
The problem is that the future is uncertain and different people may have different views of it. There are usually many possible views one could take, and stakeholders are not always able to agree on which is the most likely. Financial planners typically deal with this uncertainty by developing a small number of scenarios: often called a best case, an average case, and a worst case. These scenarios are very rarely ever the actual “best” or the actual “worst” that the planners could conceive. More typically, they are the best or worst ”plausible” cases. Similarly, the middle case may not be average in any sense of the word, but simply a case the planners happen to favour that is somewhere between the best and worst. Often the average case is the best the planners think they can get away with, and they contrast this with an outlandish upside and a still-profitable downside. As with other human utterances (eg, speeches and published papers), effective business planners take into account the views of their likely audience(s) when preparing a business plan.
For telecommunications companies operating in a regulated environment, there is a further wrinkle: the fifth “P” of telecoms marketing, Permission. To gain regulatory approval or an operating licence for a new service, telcos in many countries need to make a business case to the regulatory agency. Here, the regulators may have their own views of the future. Quite often, governments and regulators, especially those in less developed countries, feel they are behind in technology and believe that their country has a vast, untapped market ready for the taking. Sometimes, governments have public policy or even party-political reasons for promoting a certain technology, and they want the benefits to be realized as quickly as possible. For these and other reasons, governments and regulators often have much more optimistic views of likely demand than do the companies on the ground.
Thus, we have the situation where a company may prepare different business plans for different stakeholders, each plan encoding a different view of the future: an optimistic plan for the regulator, a parsimonious plan for a distribution partner and yet another for internal use. Indeed, there may be different views of the future and thus different plans for different internal audiences also, for reasons I will explain in my next post. Living with uncertainty, the post-modern corporation treats its view of the future as completely malleable — something which can be constructed and re-constructed as often as occasion or audience demands.
In my next post, I’ll talk about the challenges of planning with multiple views of the future, and give some examples.
Reference: This post was inspired by Grant McCracken’s recent post on Assumption-Hunting.