Not necessarily. Many analysts say scenario planning and risk mapping provide at least a partial solution. While we may never be able to predict extreme events with any certainty, investors and executives can prepare for the future by analyzing worst-case scenarios and considering how they would deal with them.
“Scenario analysis is a particularly useful means of understanding uncertainty and fat tails,” Bremmer and Keat said. “The main objective is to inspire creative problem solving and to spur managers to think about unthinkable outcomes.”
Some firms have put scenario planning at the heart of decision-making — Royal Dutch Shell is seen as a leader in the field. And with its annual Global Risks outlook, the World Economic Forum tries to identify key risks and assess their likelihood so that investors and businesses can prepare.
Risk planners need to be open-minded and flexible. Tetlock’s study divided forecasters into two types — “hedgehogs” who base their forecasts on a single overarching theory of the world, and “foxes” who are eclectic and adapt when proven wrong. The foxes did much better in getting things right.
Scenarios must also be adapted in the face of new data. In an influential paper on political risk forecasting, analyst Jeffrey Simon argued it is crucial for investors and businesses to continually monitor news and to update their scenarios and risk maps accordingly.
None of this means that all risks can be prepared for — there are always dangers lurking that we are not even aware of, what former US defense secretary Donald Rumsfeld famously called “unknown unknowns.”
But even most skeptics on forecasting argue that by analytically thinking about what storms may come, we may just be better prepared to deal with them when they hit us.
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