Misguided prospects: Why do we make more mistakes in predictions? – By Ingo Plöger

As if it had not already been difficult to make predictions before the pandemic, it seems that post-pandemic prospects are much worse. It is not a very common habit for those who make future projections to engage in self-criticism, critically reviewing their projections. Projections made at the beginning and during the pandemic foresaw a gigantic reduction in world growth and a much slower recovery. What can be seen is that there was, indeed, a strong but not disastrous reduction in economic activity and a much stronger recovery of 5.9%, greater than expected 1). Although we are entering a year in which the pandemic will become an endemic disease, several aspects have not yet been foreseen or resolved. I cite global and regional inflation, the disruption of global production chains, the indebtedness of countries and the increase in inequalities. As an active actor along many decades of scenarios and prospecting, I place myself at the center of self-criticism to identify some mistakes that we continually make in this exercise:

  1. Observer’s circumstance: scenario observers are in a country and in a circumstance, which is not necessarily the generalized reality. They start from assumptions of perceived realities around them. The empathic difficulty of not generalizing one’s situation with the macro is very common; it depends on the author’s detachment from their perceived reality.
  1. Mindset Paralysis: at the first moment of the crisis or impact, the author’s defensive reaction is to think as they always did about their future options. The person uses the tools to understand the circumstance, as they have always done, and draw conclusions from them, especially because there has not been much wrong with them so far. Nevertheless, this generation has never experienced a pandemic, and certainly, the circumstances were different.
  1. Absolute truths: these are theses that, repeated so many times, become indisputable paradigms. Many of the comparative measurement indicators were created by entities whose purposes are defined by their specific performance. So, the World Economic Forum measures all countries in the same way, as it understands that everyone should be treated equally, or the IMF measures savings by sustainability criteria, depending on its purpose of correction and aid, or the UNCTAD measures investments and productivity by monetizing quantitative criteria, which lead to great misunderstandings if not interpreted according to one’s circumstances. Therefore, they are repeated many times by many. Take as an example the WEF’s economic openness index for a country, which divides imports and exports by the GDP. Then compare Singapore with the USA. Of course, Singapore would be the most open of the economies and the USA would be in the middle of all countries, being a country considered as closed! It is clear that, in this case, the long production chains in the USA, where the denominator is large, are misunderstood.
  1. VUCA: volatility, uncertainties, complexities and ambiguities lead to uncertainties, which should be signals to be seriously observed, starting with weak signals that strengthen over time, like a cyclone, and strongly impact developments. They are only recognized when everyone has seen the effect and the reaction speed is no longer capable of offering safeguards. VUCA is mentioned, but not systematically followed, let alone analyzed.
  1. Ineffective measures: the symptoms may be the same, but the causes are profoundly different. It is much easier to identify symptoms than causes, and to predict measures that have worked so far. Nevertheless, there is no longer assurance about this guarantee. The best example is world inflation. After a brutal monetary easing, linked however to a supply shock, this inflation is from supply and not from demand. Inflation is fought with interest – this is the general rule –, but when oil price doubles, it is not the interest that will bring it down. This already happened in 1972. The symptoms are the same, but the causes are different.
  1. New indicators: when the Kyoto Protocol failed, the ESG, a new indicator that everyone hailed, emerged. For the E, there are hundreds of indicators; for the S, very few; and for the G, almost none. Therefore, to have a balance between sustainable factors, new indicators are necessary and commonly accepted. Until then, the wellbeing of a people is measured by GDP/per capita, and we know how fragile this indicator is, even when linked to the GINI. Perhaps the indicators of indignation are new and motivating, such as absolute poverty, hunger and misery, which, if applied to economic insertion, could become growth drivers. Social Technologies could be the assumptions for the quality of governance by improving the situation of the most disadvantaged, reducing government costs and increasing well-being.
  1. Going with the mainstream: the more widespread an opinion followed by many, the less risky it is to have a different opinion and to be challenged. Unfortunately, this is a human practice not only of those who prospect, but also of those who give opinions. Going with the trends of thought is one thing, but losing critical thinking is another. What is less noticeable in current circumstances is a constructive critical sense of understanding of diversities and the VUCA. Of course, it is not easy, but it is worth looking into the causes to be able to reflect on the effects. It is true that virtual work has increased productivity, but in schools, the rate of retention and learning has dropped. So, what was good for one is not good for another.
  1. It is safer to be pessimistic: this is at least true for economists of financial institutions because, after all, they buy the risk, and the price has to be at least fair in comparison to a greater risk. But joking aside, when pessimists are wrong, they can give an apology. Prevention is better than a cure. The optimists, on the other hand, take the risk of seeing opportunities that do not always turn out the way they expect. Today, everyone asks companies for a risk matrix. I wonder why they do not also ask for a matrix of opportunities? Because criticizing is easier than building. However, the pessimist inhibits creativity and entrepreneurship, and in the end, the evolution of sustainable development 2).

We probably have other misconceptions that we practice often. It turns out that if we do not listen to our mistakes, we will not evolve at the speed we can. This, unfortunately, is happening in our Latin America. Forecasts are worse than actual results, solutions are less effective, and hope is reduced in the people’s view. It does not take much to see that the reason for populism is often rooted in the lack of objectivity, excessive opinion, and the illusion of easy recipes.

It is worth reviewing the 2021 predictions we made in 2019 and 2020, and learning from our mistakes. Maybe we are better than we think and we do not realize it because of the built-in mindset.

 

Ingo Plöger is a Brazilian Entrepreneur, President of CEAL Brazilian Chapter

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