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Scenarios, Flags, and Probabilities

Beyond scenarios

Over the past 12 years, I have realised that our clients get quite frustrated if you offer them only a suite of different scenarios for whatever economy, market or industry they are contemplating the future of. It is like offering different pathways without any signposts to suggest which one you are on, and where it is heading.

The importance of flags

Thus, I now put as much effort into identifying flags that would indicate you are moving from one scenario into another one as we do into developing the theme of the scenarios themselves. Flags can range from tipping points that might precipitate a different chain of events (like a jump in interest rates) to ones which are a sign that you have already switched scenarios (like a rise or drop in the unemployment rate). I tend to consult experts in the field under consideration (whether it is the global economy, a country's political future or the stock market) about the flags they are watching out for. The purpose of flags is to remove the tint from the glasses we all wear when we look at the future. The tint may be caused by emotional make-up of being a natural optimist or pessimist, or by simple bias. The fact is that as the flags rise, they cannot be ignored.

Subjective probabilities

The second step I have added is to place a subjective probability on each scenario based on whether its flags are going up or down. Just to state that the likelihood of a scenario is rising or falling I feel is unhelpful. It is void because of vagueness. You have to give a percentage figure where 1 to 10% is a wildcard; 11 to 25% is a possibility; 25 to 50% is a strong possibility; over 50% is a probability and over 80% a near certainty. I like to stick to round numbers e.g. 10, 15, 20, 25, etc. in order to avoid giving a false impression as to the precision of my judgement.

I must stress that my number is derived from intuition and instinct because I do not believe that any mathematical model can link our flags to the probabilities we assign. The future only happens once, so it is not like a laboratory experiment you can repeat to obtain a statistical pattern of outcomes. Furthermore, much about the future where mankind is concerned is determined by 'animal spirits' - a Keynesian expression - where pure emotion is responsible and difficult to predict.

Even with this technique which is much more flexible than pinpointing the future with a forecast, I am the first to acknowledge that I will not capture all that is important that happens. In The Mind of a Fox, I talked about known unknowns and unknown unknowns - things you know you don't know and things you don't know you don't know. A very good book by Nassim Talieb entitled The Black Swan covers the same issue in a thoroughly comprehensive manner. When a 'black swan' event happens, i.e. an unknown unknown that comes out of the blue, you really need the resourcefulness and agility of a fox to handle it!

Examples of flags

Here are three examples of flags I have chosen in the past and the probabilities associated with them as they rose:

1. The release of Mandela For the 1987 'High Road' scenario for South Africa, one of the flags was that the ruling government was prepared to negotiate the country's future with the real black leaders rather than with a token bunch co-opted into power. The release of Nelson Mandela in February 1990 increased the probability of the 'High Road' from the wild card range to a strong possibility. The formal opening of negotiations on a new constitution shortly thereafter turned the scenario into a near certainty, and with the election in 1994 the scenario became reality.
2. 9/11 In 2001 in The Mind of a Fox, I included a letter to President George W. Bush saying that his principal threat was a massive terrorist attack on a Western city. Whilst I was wrong about the type of event - we talked of nuclear terrorism in the letter instead of planes flying into buildings - we were quite correct with the three flags that made us rank a strike as his principal threat which could lead America into a 'Gilded Cage' scenario. They were: The growing confrontation between the major religions in the world in the early 1990s, particularly Christianity, Islam and Judaism; The re-equipping of organisations dedicated to the downfall of America in the mid-1990s in places like Afghanistan; and, The two attacks in 1998 by Al-Qaeda on American embassies in Africa - one in Kenya and the other in Tanzania - which we felt was a dress rehearsal for the real thing on Western soil. Because these flags had risen, when the letter was published in June 2001 I gave a huge terrorist strike on the West a higher probability than any other threat. This raises an important point about scenario planning. You will never capture the actual date of a major event and the way it plays out with a scenario (unless you have inside information). You can however make people re-perceive the flags that would indicate an event is in the offing.
3. The 2008 global economic meltdown When I published Games Foxes Play in 2005, I highlighted the fact that the global economy could move from a 'Long Boom' scenario to a recession-linked scenario we called 'Hard Times'. The flag for the shift was a decline in US property values causing American consumers to stop spending as their principal asset (i.e. their house) was declining in value. This would trigger a decline in the US economy, as two-thirds of it was represented by consumer spending. In the last quarter of 2006 the Case-Shiller index - which measures property prices across the US - topped out, and in January 2007 began a fall which continued into the middle of the year. Accordingly in mid-2007 I gave 'Hard Times' a 50% probability, even as the stock market was continuing to rise. When the Dow Jones Industrial Average started falling later that year, we raised the probability further to 80% - a near certainty - and with the collapse of Lehman Brothers in September 2008 the scenario became a reality.

The scenario gameboard

Apart from adding flags and probabilities to the process of scenario planning, I have found it most useful in the sessions I facilitate to depict the scenarios as a scenario gameboard. This is a 2x2 matrix developed out of the two key variables which could influence the game under consideration. Plenty of effort has to go into identifying these two variables, and normally we assist the participants in making a list of influential factors which could go either way, prioritising them, and then choosing the most relevant and appropriate pair.

For big picture scenarios around the global economy and the like, the variables are normally both external, i.e. beyond the control of the organisation looking into the future. As can be seen with my latest Global Scenarios and South African Scenarios, the diagrams illustrate the effectiveness of this procedure because you have a visual image of the relationship between the different scenarios which a written list can never convey.

As another example, a Business Gameboard uses variables, or axes, that are a combination of internal and external factors; i.e. movement on the gameboard is partially within the control of the organisation itself, but there are still external influences.

To be a fox, you have to consider all the frames of reference that can affect your business from the state of the international economy to the state of your country or city, to the state of your industry, to the state of your company or organisation, to maybe the state of your business units and the departments that make up your company or organisation. You should also hold all the scenarios simultaneously in mind as potential 'truths'. As in the world of quantum physics, there is nothing contradictory in doing this. It is only after the period to which they pertain is over that they collapse into one 'truth' - and even then history is often the subject of heated debate.

Conclusion

In summary, foxes do not just construct scenarios. They also want to make the decision-makers aware of the clues that the future always has on offer to signify imminent change. That is why selecting the flags is crucial in our methodology, as is assigning probabilities, as is portraying our scenarios on a gameboard to give a complete, integrated picture of what might happen. Nevertheless, as I said in the introduction, a fox also connects all the dots and, based on the probability and impact of the scenarios on the organisation concerned, decides whether something should be done immediately or a contingency plan should be prepared. In other words, it is also about timing. Sight, thought and action are combined in the mindofafox.

Equally, foxes know that no scenario will ever capture the future exactly. But the process of scenario planning opens your mind to a range of paths and possibilities, which makes you more prepared for what actually happens. As the legendary scenario planner Pierre Wack once said: "It is better to be vaguely right than precisely wrong!"

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