Tuesday, May 06, 2014

The awe of large numbers. Optimistic forecasters live larger than life.

In one forecasting project I worked on many years ago for a senior VP presentation, the executive was concerned my numbers were way too low and just didn't look interesting. I was asked to bump them up. Somehow.

I understand. People do love big numbers and fat CAGRs. Bar charts that look like mountains growing to the heavens. Line graphs with arrows at positive 45° angles. Up is always better than down. Steep is better than flat. The bigger the figures the better the funding.

I was recently churning some numbers with my colleague, creating forecasts for several market research studies we will be publishing at Research Capsule. Growth rates were coming in at nice, respectable levels. 17%, 25%, 40%. But then we compared these to some other market projections. 100%, 150, 200. Such numbers do make great headlines. But could lead to some bad business decisions.

Are optimistic forecasters more likely to be invited to the party? Yes they are. Executives will pay a premium for what are likely exaggerations. I've come across my share of embellished projections. I now see that "trillion" has become the new billion when it comes to dollar figures. There will be many "next trillion dollar industries."

Everybody likes an optimist. This is the flaw of large numbers.

When it comes to market forecasting, it usually pays to be full of it:

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