Scenarios and Probability
Analysis
The Essentials
By Gerald Harris
President, Quantum Planning Group
Email: [email protected]
October, 2014
The Key Points
• The future cannot be predicted accurately (self evident in human history).
• Scenarios (in the Shell/GBN sense) are attempts at qualitative assessment
of whole systems. The use of narratives informs the reader that the key
purpose is to influence “the mental map of decisions makers.”
• Reasonably accurate forecast can be useful over short periods of time and
in whole systems that are subject to no or very little change or volatility
(very rare). Over the longer term there are no systems that are do not
change, so use scenarios to plan for uncertainty.
• Because change is often structural in nature, and those structural changes
are unpredictable and occur for reason that are often “invisible,” a diverse
set of scenarios used in a learning-oriented mode can be helpful.
• The probability of each scenario in a set of scenarios should be seen as
equally likely so that thinking and learning from the process is optimized.
• Within each scenario a probability distribution around an event or issue
can be created. Moving from one scenario to another a particular
probability distribution should vary as the structural conditions are
different.
Why it is important to remember the
future is unpredictable
• The human mind is subject to unconscious cognitive biases
driven by a range of factors from culture, to self-interests, to
weaknesses of the ego.
• People can become overly fascinated with predictive models
that can never account for all factors in a complex and
changing environment.
• Lucky guesses (even those based on “sophisticated” analysis)
can lead people to think they know more than they do.
• Autopsies of many disasters show attachment to predictions
tied to outdated beliefs.
• Embracing a positive openness to an unpredictable future
seems to work well.
The Structural Nature of Scenarios
Scenarios start with a qualitative, narrative-based approach to looking at the
whole complex and organic environment in which our decision will play out.
The human mind is seemingly designed to like, create and recall stories.
Environmental Issues
Demographics
Increasing complexity of the question
Contrasting Forecasting and Scenario Analysis
Complex question/non
complex environment
Complex question/complex
environment
Use forecast in
learning mode and a
diverse set of experts
Use multiple sets of
scenarios over a long
term in a learning
mode
Clear question/noncomplex environment
Clear question/complex
environment
Use content experts
and short term
forecasts with
quantitative analysis
Use focused
scenarios with
quantitative analysis
Increasing complexity of the environment
Increasing complexity of the question
Contrasting Forecasting and Scenario Analysis
Complex question/non
complex environment
Complex question/complex
environment
What might little boys
want this Christmas?
What is the future of
the Middle East over
the next 20 years?
Clear question/noncomplex environment
Clear question/complex
environment
How many tickets will
sell in major league
baseball in 2014?
What is the future of
solar power in the
US over 10 years?
Increasing complexity of the environment
Usefulness of Probability Analysis
• If there is a good historical record of an event
it is possible to develop a useful probability
distribution based on the past.
• It is not always clear how far to look back into
a historical record and this is often a
subjective decision (prone to error).
• If there is a structural change in the
environment which causes a departure from
past conditions the usefulness of probability
analysis can fall dramatically.
• Since scenarios are what-if plausible stories,
they should all have the same probability of
occurring in the mind of a decision maker.
Using Probability Analyses with Scenarios
As the structural underpinnings change from one scenario to the next the factors which might
impact the shape of a probability distribution will change accordingly.
A comparative analysis of the different probability distributions can be use in a learning mode.
Summing Up
• Carefully used probability analyses can be a
useful companion to scenario analysis.
• Care must be given to understand the context
(level of complexity of the question and the
environment) when using probabilities with
scenarios.
• In general hold a learning-forward orientation
with a dose of humility.