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Why all forecasts are doomed to fail

by Lucy Swedberg

February 1, 2011

by Lucy Swedberg, Group Editor, SAPinsider & insiderPROFILES

I just finished reading this article from the MIT Sloan Management Review, entitled “Why Forecasts Fail. What to Do Instead.”:

sloanreview.mit.edu/the-magazine/article...

In the article, authors Spyros Makridakis, Robin M. Hogarth, and Anil Gaba conclude:

  1. In most areas of business, accurate forecasting is simply not possible.
  2. Complex statistical models are worse at forecasting than simple ones. And human judgment is the worst predictor of them all. (In fact, an expert can’t predict trends more accurately than a moderately well-informed person on the street.)
  3. Going forward, managers should amp up the amount of uncertainty they factor into their forecasting models. Chances are good that managers underestimate the amount of uncertainty they face, even if they are very realistic when they assess it.

Ouch. Seems like grim news if you’re responsible for forecasting — or anything having to do with forecasting — at your company. Why do we even bother with forecasting, then, if all forecasts are doomed to fail?

Well, it’s simple: We forecast because we have to. Managers still have to make important business decisions based on what they think will happen in the future. But we just need to be more attuned to the uncertainty we’ll face. We need to plan as best we can, and then be prepared to adjust — and not get flustered — when our plans don’t pan out as we thought they would.

These themes are rampant in our recent SAPinsider Special Report: “Operations Excellence: Thought Leaders, Strategies, and New Technologies to Watch in 2011”. Here’s a quick breakdown of the articles and topics inside:

Great insights here. And proof that, despite the conclusions of the MIT Sloan Management Review article, managers can — and should — still forecast and respond to changing market conditions.

Your thoughts? Is forecasting just an exercise in futility? Or have you seen good forecasts save the day at your firm?

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