The F Word
Boulder continues to make national headlines as America’s Startup Capital. In honor of another successful Boulder Startup Week, we launch our business blog with a topic particularly relevant to the new and/or aspiring business owner: the F word. No, it’s not four letters, but the contention could certainly be made that it should be. As if the future isn’t unnerving enough, Dear Entrepreneur, you’re expected to be able to predict it. With pinpoint accuracy. No, the “F word” is not Future. It’s Forecast.
Your business, marketing, and sales plans are excellent tools to make educated guesses regarding your financial future — but no matter how thoroughly planned, your forecasts are just educated guesses. Sure, things might be going on track to project 7-percent growth on a particular revenue stream next year, but what happens if your go-to vendor goes out of business? Or you’re faced with unexpected expenses that derail your productivity? Will that 7-percent growth trajectory remain, unwavering? Not likely.
Despite humanity’s collective agreement that we can’t predict the future, we’re expected to do so in business routinely. Overwhelmingly, the most common method for forecasting is still the single-value point estimate. Contemplating an advertising investment that you want to mention in your business plan? Investors will also want to know your expected return — down to the dollar, if you’re limited to the single-value forecast. And let’s be honest, the person making these forecasts isn’t a robot! That person is a person, filled with aspirations, particularly regarding the success of the business. So overconfidence often creeps into the forecast, especially when creating a range of forecasts, which are often limited to best- and worst-case scenarios. According to research by the Harvard Business Review, forecasts with 90-percent confidence intervals (meaning they should be accurate 9 out of 10 times) typically come to fruition less than 50 percent of the time. Not exactly heartening stuff.
But there is good news! Uriel Haran and Don Moore recently announced via HBR the development of a new forecasting method they call SPIES (Subjective Probability Interval EStimates). Instead of working from two-point predictions, SPIES creates a range of forecasts from a series of probability estimates. It takes the entire range of considered outcomes and breaks those outcomes into intervals, or “bins.” The person making the forecast, then, gauges the likelihood for each interval containing the accurate value. SPIES can make a forecast at any confidence level that best serves the business’ needs.
Early research has been promising:
“For example, in one study, participants used both confidence intervals and SPIES to estimate temperatures. While their 90% confidence intervals included the correct answer about 30% of the time, the hit-rate of intervals produced by the SPIES method was just shy of 74%. Another study included a quiz of the dates in which various historical events occurred. Participants who used 90% confidence intervals answered 54% of the questions correctly. The confidence intervals SPIES produced, however, resulted in accurate estimates 77% of the time,” HBR reported.
Imagine increasing the accuracy of your predictions by more than 20 percent. You could more accurately reduce waste, manage projects, predict revenue… the possibilities go on. We’re still waiting for a downloadable calculator; stay tuned! In the interim, you can play with the tool embedded in the above-cited article.