On forecasting as the slave of our passions

Last weekend I was reading Dominic Lawson’s Sunday Times (London) review (10 November 2013) of Normal Greenspan’s recent book The Map and the Territory: Risk, Human Nature, and the Future of Forecasting. Lawson expresses his astonishment at what Greenspan says.

I and other economic forecasters didn’t understand that markets are prone to wild and even deranging mood swings that are uncoupled from any underlying rational basis.

I have to share Lawson’s astonishment. After all, Greenspan was the man who criticised the markets’ irrational exuberance back in the 1990s.

Lawson usefully reminded me of an important observation by eighteenth century philosopher David Hume.

Reason is … only the slave of the passions and can never pretend to any other office.

Perhaps computer pioneer Marvin Minksy put it in a more colloquial way.

Logic doesn’t apply in the real world.

That is something that we have to be very wary of in the management of an enterprise. Whatever the consensual mission, it is ultimately under threat from narrow decisions by individuals, or self-reinforcing groups, that might be influenced more by emotional reactions to local events than by an appreciation of the organisational system. I think that there are some things leaders can do to minimise the risks.

Firstly, put key measures on a process behaviour chart and run it continuously. This provides a focus for discussion, for testing opinions and for placing decision making in context.

Secondly, formalise periodic reviews of process capability accompanied by a reappraisal of, and immersion in, the voice of the customer. Communicate this review widely. Do not allow it to be ignored or minimised in any discussions or decision processes.

Thirdly, just be aware of the risks that decisions might be emotionally founded with only post hoc rationalisation. Keep an eye on people who chronically avoid engagement in the process behaviour chart and capability study. Be mindful of your own internal thought processes. They are certainly less rational than you think.

I think that with those precautions organisations can harness the positive emotions that generate enthusiasm for a product or process and passion for its continual improvement.

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