Embracing Uncertainty with Scenarios

Embracing Uncertainty with Scenarios
June 24, 2020 Virtual Consulting

By Gideon Malherbe, VCI Founding Partner

Rule #1: Don’t choose a Scenario as your favorite, unless you want to end up deeply disappointed. The purpose of crafting alternative Scenarios is to have a broad view of the future to give you a much more robust strategy and detailed playbooks.

Rule #2: Confirmation bias is your enemy and as data flows in, we are particularly bad at noting data points that counter our new insight. The double whammy about this is that we tend to be particularly proud of new insights and thus desperately want them to be true. Be skillful in seeing the early signs, but don’t draw fast conclusions!

Rule #3: The world will change because of unknown-unknowns, stuff that is frankly unthinkable. This is usually a novel combination of known forces that we have never before seen, nor imagined. Counter to fundamental economic modeling, all things do not remain equal.

So, where do we begin with business and economic analyses to gain meaning in our Scenarios?

Obviously, there is a need for some anchoring, and you will notice there is a large amount of anchoring happening between this pandemic and the 2008 recession as well as the Spanish Flu. This exercise is fine, but we must go further. We work with economic ratios like annual income per capita, butter consumption per capita, and so on. And we use credible surveys to gain insights into what people are thinking.

With these benchmarks and references in hand, each Scenario is modeled to a potential future economic outcome at some identified point in the future. Naturally, we apply the economic elements that are relevant to the industry in which we’re creating Scenarios.

This leads to the shareable insight of this note: If we apply the benchmarks and references conservatively to increase the credibility of the Scenarios, we usually end up having been too narrow in our forecasts and we miss key opportunities. If we go quite liberal in our projections, we always find new opportunities in the Scenarios. However, there is always the chance of over-valuing them. The take-home note in this world of abundance is: It’s better to catch the opportunity and overvalue it than to miss the opportunity altogether, and then watch competitors or new entrants walk away with the prize.

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