Six Rules for Effective Forecasting

SIX RULES FOR EFFECTIVE
FORECASTING
HARVARD BUSINESS REVIEW/ JUL 2007
PAUL SAFFO BY: V. SHAMEKHI

The role of the forecaster in the real world is quite
different from that of the mythical seer…
The primary goal of forecasting is to identify the full range of
possibilities, not a limited set of illusory certainties…

Above all, the forecaster’s task is to map uncertainty,
for in a world where our actions in the present influence
the future, uncertainty is opportunity…

Whether a specific forecast actually turns out
to be accurate is only part of the picture—
even a broken clock is right twice a day…

Unlike a prediction, a forecast must
have a logic to it. The forecaster
must be able to articulate and
defend that logic…

Even after you have sorted out your forecasters
from the seers and prophets, you still face the
task of distinguishing good forecasts from bad,
and that’s where this article comes in…

Rule 1: Define a Cone of Uncertainty
Effective forecasting provides essential context that informs your intuition.
I visualize this process as mapping a cone of uncertainty, a tool I use to
delineate possibilities that extend out from a particular moment or event.
The forecaster’s job is to define the cone in a manner that
helps the decision maker exercise strategic judgment.

Toyota Prius
Drawing a cone too
narrowly is worse than
drawing it too broadly.
The cone can be narrowed in
subsequent refinements. Indeed,
good forecasting is always an
iterative process.
The most commonly considered
outliers are wild cards. These are
trends or events that have low
probabilities of occurrence (under
10%) or probabilities you simply
cannot quantify but that, if the
events were to occur, would have
a disproportionately large impact.

Rule 2: Look for the S Curve
Change rarely unfolds in a straight line.
The mother of all S
curves of the past 50
years is the curve of
Moore’s Law.
The art of forecasting is to
identify an S-curve pattern
as it begins to emerge,
well ahead of the
inflection point.

Futurist Roy Amara pointed out, there is a tendency to overestimate the
short term and underestimate the long term.
Once an inflection point
arrives, people commonly
underestimate the speed with
which change will occur.
One reason for the
miscalculations is that
the left-hand part of
the S curve is much
longer than most
people imagine.

Rule 3: Embrace the Things That Don’t Fit
The novelist William Gibson once observed: “The future’s
already arrived. It’s just not evenly distributed yet.”
The best way for forecasters to spot an emerging S curve is
to become attuned to things that don’t fit, things people
can’t classify or will even reject.
By definition anything that is truly new won’t fit into a category that
already exists.

Where it ends is still uncertain, but it is unquestionably
a very large S curve.

Other Examples…
Two DARPA
Grand
Challenges
Roomba
(Smart
Vacuum
Cleaner)
PC in the
early 1980s
The World
Wide Web
in the mid-
1990s
One indicator: Roomba
owners today can even buy
costumes for their robots!

Rule 4: Hold Strong Opinions Weakly
One of the biggest mistakes a
forecaster—or a decision maker—can
make is to over rely on one piece of
seemingly strong information because
it happens to reinforce the conclusion
he or she has already reached.
Shores of central California on the
fog-shrouded evening of
September 8, 1923

Thomas Kuhn said “The
Structure of Scientific
Revolutions”
Good forecasting is the
reverse: It is a process of
strong opinions, weakly held.
be the first one to prove
yourself wrong.
The way to do this is to form a
forecast as quickly as possible
and then set out to discredit it
with new data.

Having strong opinions gives you the capacity
to reach conclusions quickly, but holding them
weakly allows you to discard them the moment
you encounter conflicting evidence.

Rule 5: Look Back Twice as Far as You Look Forward
The texture of past events can be used to connect the dots of
present indicators and thus reliably map the future’s
trajectory—provided one looks back far enough.
History doesn’t repeat itself, but sometimes it rhymes.

Search for
similar patterns,
keeping in mind
that history—
especially
recent history—
rarely repeats
itself directly.
The hardest part
of looking back is
to know when
history doesn’t fit.

Rule 6: Know When Not to Make a Forecast
A simple fact is that even in periods of dramatic, rapid
transformation, there are vastly more elements that do not
change than new things that emerge.
it is important to note that there are moments when
forecasting is comparatively easy—and other
moments when it is impossible.

The cone of uncertainty is not static; it expands and
contracts as the present rolls into the future and certain
possibilities come to pass while others are closed off.
Be skeptical about apparent changes, and avoid
making an immediate forecast—or at least don’t
take any one forecast too seriously.

Forecasting is nothing more (nor less)
than the systematic and disciplined
application of common sense.
The best way to make sense of
what lies ahead is to forecast
for yourself…

Six Rules for Effective Forecasting

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