Scenario Planning, or, How not to fall for “The sky is falling”

By Christopher Peck

Lately almost every day someone has asked me some variation of the following question: “Hey Christopher/ financial advisor/money dude/human, I’ve been reading about Peak Oil/falling dollar/pending terrorist attacks/ trading account deficits and I’m thinking about selling my stocks/bonds/mutual funds/house/child and then moving to Costa Rica/buying gold/joining the Hare Krishnas/taking hunting lessons. What do you think?” I don’t intend to denigrate anyone’s opinions here, but when everyone is asking you essentially the same question, one begins to develop some theories along with the stock answers. So this article is about one of the strategies I use: scenario planning.

Scenario planning helps decision makers by introducing them to significant interactions of major variables, and presents those interactions in the form of short, meaningful, memorable, and creatively titled stories, known, surprise… as scenarios. Developed by military planners and used extensively by large corporations, most notably Royal Dutch/Shell, it’s a useful tool for thinking about big trends occurring in the world, and how to make sense of the future. But let me back up a little and explain some of the context of why I think scenarios are interesting and important.

The place I start when talking about scenarios is what I call the “key point”: we cannot predict the future. Accepting the fact that we cannot predict the future is essential for understanding portfolio management, asset allocation, in fact all kinds of planning and decision making processes and tools. When I’m talking with people face-to-face I usually make a funny little fist

(like the way the left hand is held during Single Whip, for Tai Chi players), and use this as a referent for the key point – we cannot predict the future. I wave my funny fist around a lot, and can even slam it down on the table to really make the point: we cannot predict the future. Now, you might have special powers to predict the future; if so, please contact me immediately, I have some investments for us to play with….

OK, so let’s say we’ve accepted the key point (yes, everyone say in unison, “we cannot predict the future”), our next question is, what do we do then? We don’t just throw up our hands in despair, we have to do something, to take some action. Usually folks will perk up at this point, and though wary of my funny fist, will say something like “Sure, we can’t predict the future, but what about trends? We see major trends all around us, certainly that gives us some predictive capacity, right?” Still brandishing the funny fist, I launch into a profound and lucid explanation of complexity mathematics (aka chaos theory), predicting the weather, how the stock market is like the weather, and so on, which I won’t go into here, due to space constraints. Suffice to say everyone’s dutifully convinced that even knowing major trends, we don’t have predictive capacity. Or at least we can’t predict which one single outcome will prevail. And that’s really the whole point isn’t it? I think we all understand intuitively that there are many possible futures, we just want to know which single possible future will come about, so we know which way to bet the farm, or how to save the farm.

And that’s the challenge underlying the essential pressing question I opened with: we’re afraid of guessing wrong, that the one possible future scenario we’ve been hearing so much about, with all of its dire predictions, will come about. We’re afraid that we’re not adequately prepared for that one horrible future, and want to take suitable measures to protect ourselves and our families. It’s not made any easier when everyone around you is also mildly freaking out about the horrible future; to question it is to be in denial, stupid, or even worse, out of it. It’s not hard to see where all of this comes from: bad news sells, doom and gloom is compelling, easy email ensures access to angst, rational planning is not sexy, and so on.

Let’s assume that you’re convinced of my argument up to this point: we can- not predict the future, trends don’t help us much, knowing which one possible future will occur is impossible, horrible predicted scenarios grab all of our attention. Assuming all that, we still need rational planning. We need some way to make decisions in a meaningful way that can guide our actions now, to best position ourselves for whatever future may come about. Scenario planning to the rescue! As you can see, I’ve reached the end of this article, it’s to be concluded next newsletter. If you can’t wait 3 months to find out how it all turns out, email me, and I’ll send you the stunning conclusion. In the mean- time, don’t fall for the one horrible future pitch, and stay peaceful.

Tags: ,

Trackback from your site.

Christopher Peck

Welcome to my archive of newsletter articles and blog posts. For more information on my service offerings, please go to my advisor webpage.

Leave a comment