Making decisions based on sound data – why it can be dangerous to follow the herd
Having access to accurate market forecasts is important to any business that believes in making data-based decisions. The keyword here is ‘accurate’, an inaccurate forecast can be immensely damaging. This is why I was particularly interested in an article that discussed how forecasters define success. It raised some points that rang true with me about the pressures that forecasters face, and the potential danger of trusting a forecast based on consensus.
Conventional forecasters often choose not to stand out
The future is uncertain. As a result of this ambiguity, it can be attractive for analysts to prepare a ‘safe’ forecast; one that falls within the bounds of the consensus view of others. This is a particular problem when the forecast is designed for public consumption, where, if a prediction that diverges from the herd is proven to be inaccurate, it could damage that company’s reputation. Dan Hodges discussed this in his Telegraph Blog last year. He describes how when companies feel that the commercial and reputational risk of a forecast being wrong is too great, then analysts are tempted to manipulate their results to bring their figures back into the herd.
This is very dangerous, because no one wants to be the first to leave the herd. If no forecaster is willing to publish a different view, then over time the group consensus can start heading in the wrong direction. This herding activity was seen when not a single prediction was made for a recession in 2009 and how pollsters forecast the 2015 UK general elections would be a tie, when the Conservatives ended up winning an outright majority.
Objective forecasters have freedom to seek accuracy
Bespoke forecasts produced by independent experts have more freedom to create clear hypotheses based on underlying data which aims for accuracy rather than safety. These independent insights should be designed to give you the most accurate information possible; with the assumptions that drive the forecast discussed, understood and agreed, plus for in-house data/views of industry trends to be incorporated to ensure the forecast is market-reflective, not ‘safe’.
Commissioning bespoke analysis is more expensive than buying an off-the-shelf report, but it is money well spent if it arms you with market insights that allow you to make the ‘right’ decisions.
Given the importance of having accurate forecasts – how do you validate the market forecasts you use to run your business?
About the author
Jonathan Davenport is Head of Market Analysis and has particular experience of using market and competitor analysis to support strategy development. He works for Milner Strategic Marketing, a business consultancy that helps companies grow their value by delivering a range of services from strategic management consultancy through to specific marketing programmes.