Can you explain for someone about uncertainty and applying uncertainty to a forecast? – jd
Eli Scrangenheim: Forecasting tries to give me some information. Let us say partial information about the huge question about what will happen tomorrow. How much will I sell tomorrow? How much work will I be able to finish tomorrow or whatever? Which means we are not prophets, we do not know what will happen tomorrow, period. We don’t know that we do not know anything, anything might happen and does it have the same weight? If my way from my home to the airport, something that they do pretty often, let us say on average takes two minutes. OK but they need to make a decision about when I go out of home to go to the airport to take a flight. Could it be 10 hours? Well, let me tell you that this would be not just surprise; this would be up in the news.
Which means it is probably not impossible but quite improbable. This gives us some kind of a clue. I can say something about how long will it take the way to the airport like. I might say how much we sell next week. Well I cannot tell you something precise but I can tell you something that is more than nothing. And this is the key.
In order to know what the partial information is we need at least, and this is the most minimal mathematical requirement to do. Anything about it we need at least two things. We need something, call it an average, a central, something in the middle. Give me something that gives me an indication how much far away from this middle it could happen. And this eventually is coming from forecasting.
In forecasting in order to deliver this very partial information there is another assumption that says we basically believe that tomorrow will not be much different than today and the day before it. So we look into the past in order to predict the future.
We cannot really predict the future. We can predict some reasonable range of the future, and this is what we need to make any decision. This is hard to forecasting. Forecasting is an unbelievably to my mind important tool for managers, but again they need to understand what does it mean and what does it contain and how wrong could it be.
I don’t know how wrong because they don’t like to say how wrong about forecast, which never intended to give you anything that precise. So what do you mean by wrong. But it could tell you whether you can have a narrow, a range or sorry you have quite a wide range, so make up your mind what you are going to do with it.
So I think it is very valuable information that is really required for daily decision making and I am sorry to say that a vast majority of the people do not understand it.
Joe: That’s the logical side of it. The intuition as a business manager, how does he go about justifying his intuition to himself?
Eli: Well intuition probably is the word to the uncertainty, is also a word to what I like to call the reasonable range. Because of this intuition many times leads you to the right thing. But the intuition as such has a huge disadvantage. Intuition is lost when there is a real change, when tomorrow is definitely not the same as today. So if I take a flight, let us say that I go to St. Petersburg in Russia. Well, it looks like that the transport, the language, the behavior of people are all different. Because of this suddenly I realize that I lost my intuition.
There is another huge disadvantage of intuition which is, it is not a good communication line. Goldratt likes to make a point of this. Which means as long as I feel something I cannot deliver to others this kind of feeling. Which means that while people are aware of uncertainty, each one of them is taking their own decision based on intuition? There is no communication, the communication is pretty much lost and there is huge amount of misunderstanding around the people who are supposed to do something with a decision around forecasting or something of that sort.
Joe: One of the points that you have made before is making decisions based under severe uncertainty. The first thing that popped out of me with that line was the fact that under stress we follow our intuition, don’t we?
Eli: Probably yes and in a way we should but I think we also need to put our logic as a control. Normally I would guess that we act based on intuition or even emotion but then luckily we have also some logic that is kind of guards to prevent us from doing major mistakes. But uncertainty is difficult, because it is difficult even on the intuitive side, certainly on the emotional side to deal with some things that you don’t know. Because you don’t know what will happen and from where and so you need some kind of guidelines from logic to guide you eventually, your emotion led decisions.
Related Podcast and Transcription: Uncertainty in your Decision Making
About: Eli Schrangenheim has been part of the Theory of Constraints movement practically from the beginning. He started working with Dr. Goldratt as a programmer to program a game for adults that would teach them how to think over 25 years ago. He is the author of Management Dilemmas: The Theory of Constraints Approach to Problem Identification and Solutions.
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