Scenario-Based Forecasting: What you need to know for life and for work

I was introduced to this tool in the early 1990s, right after I witnessed a CEO who didn’t understand it drive a large company off a cliff. Mentioning names now is pointless. The company was famous at one time, even bought ads on the Superbowl. The names would mean nothing to most readers now.

Scenario-based forecasting is also something about which our political leaders and most business owners know nothing. If they did, the coronavirus and shutdown would have been a much less impactful event.

For individuals it’s an essential tool for planning for life after 65. I won’t call that “retirement” anymore; most people will never retire.

For companies, it’s essential for smooth operations and even survival.

So what is it?

By identifying basic trends and uncertainties, a manager can construct a series of scenarios that will help to compensate for the usual errors in decision making — overconfidence and tunnel vision.

The truth is that we don’t know what the future will bring. No one has that crystal ball. We know that some things are more likely to happen than others (sunrise versus hurricanes, for example). We also know that some events will have more of an impact on us than others (a hurricane versus a sunrise, for example).

The items that are either “sufficiently” likely or catastrophic require consideration. For instance,

  • Who is going to take care of your kids if you get killed in a car accident? Do you really want them to go into the state foster care system? (You need a will addressing guardianship.)
  • What are you going to do financially when the NEXT coronavirus hits? (Come on, people, we’ve had a bunch already, why won’t we see another one?)

At the other extreme, what color you choose for your next car probably doesn’t affect me in any way. And while a bit meteor crashing into our planet would probably end life as we know it, no one is going to be around to buy anything or collect bills after it happens, so ignoring it is probably ok. Unless you’re in the astronaut corps. A winning lottery ticket and getting hit by lightning are both absurdly unlikely, so ignore.

Betting that one thing — and only one thing — can happen is just stupid.

So you build scenarios about what is plausible to happen that would seriously effect you.

A scenario is like a book with multiple endings. With the book, you get to choose the ending you want. With life, Mother Nature makes the choice. You get to decide how you’re going to deal with Her choice. Each of the options that she could choose is a “scenario.” Planning means that you assemble the resources so that you can deal with what she chooses.

Lack of planning means that you’re depending on friends or the government for a bailout, which may or may not happen. You want to trust your company or your family’s well=being to a politician?

So what are some of the things you need to consider:

  • You or your SO could get seriously ill or die. It doesn’t matter from what. There are lots of choices, some fashionable and some mundane.
  • Another mass illness. It could be another wave of this one, or a new one. It really doesn’t matter. How are you going to make the next one better for yourself and your family?
  • High inflation. If not now, sometime. Government spending and tax cuts for the rich virtually assure that will happen.
  • A stock market crash. It took 21 years for people to make up the losses they suffered in 1932. Can you afford that?
  • Education for your kids. Continued education for yourself. Survival is based on brain, not muscle. It always has been. Homo sapiens (aka, ourselves) were never the strongest on the planet, just the smartest.

This is the first of a series of pieces on scenario-based planning.

To start this process,

  1. Make a list of things that have a reasonable chance of happening that would impact you and your family in the next two years, both positive and negative. You might have other family members make their lists and compare them with yours. Eventually, you want to look out five or even ten years ahead, but I’d start with a shorter time frame. It’s easier.
  2. Using a 1-to-10 scale where 1 means no impact and 10 means extreme impact, assign a number to each event in terms of what it would do if it happened. How big a deal would each be?
  3. Using percentages, what’s the likelihood of each event happening? Yes, this is guesswork, and you should update your worksheet periodically as Mother Nature makes her choices known.
  4. Multiply the impact and the percentages together.
  5. Figure out how you will cope with the items with highest numbers.

Meanwhile, if you have any questions, pleases feel free to call me. 609-510-3712.

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