Decision-making - Choosing between conflicting forecasts (4 of 4)

Just because you broaden your sources of information—as we discussed in the previous post—it doesn’t mean all your decision-making problems are solved!

What happens when everyone has a different opinion?

A Forecasting Dilemma

Suppose your company sold 20 units last year, and your 10-person team gathers to forecast sales for the coming year. Here’s what happens:

• Two optimists think sales will grow significantly: one forecasts 35 units, the other 40.
• Two pessimists believe competitors’ innovations will erode sales: one forecasts 15, the other 10.
• Four steady voices predict sales will stay flat at 20, citing customer loyalty and old habits.
• Two enthusiasts believe an R&D breakthrough and market shifts could skyrocket sales to 80 or even 100.

How do you make sense of this wildly different range of numbers?

The Lobo-Yao Formula for Forecast Accuracy

Let’s return to the INSEAD paper by Lobo and Yao (previously discussed, and further explored in sources like Arab News).

After analyzing 20,000 forecasts, they concluded that the most statistically accurate forecasting method is:

1. Take the average of all forecasts.
   • (In our example, the total is 360 units, so the average is 36.)
2. Find the median forecast.
   • (Here, the middle value is 20.)
3. Take the average of those two figures.
   • (36 + 20) ÷ 2 = 28.

According to Lobo-Yao, this formula outperforms individual forecasts and produces the most accurate prediction.

Why This Works

• It incorporates diverse viewpoints, recognizing that different people see different but relevant facts.
• It avoids overconfidence, preventing any single individual from dominating the decision-making process.
• It leverages collective intelligence, trusting the wisdom of the crowd over personal biases.
• It encourages participation, valuing every input without necessarily choosing any one person’s forecast.

From Forecasting to Decision-Making

Now, you have a formula for making better decisions when facing conflicting predictions. It helps reduce internal conflict while also being more likely to be correct than relying on a single person’s judgment.

To sum up this series of posts, the best decision-making happens when your company develops:

• A common financial language → Business literacy ensures everyone understands the numbers.
• A holistic business perspective → Seeing how decisions in one department impact others.
• An inclusive, objective decision-making culture → Strong business acumen leads to better long-term success.

Free Business Acumen Resources

Our website offers free resources to help develop business literacy and business acumen.

For example, you’ll find illustrated definitions of key financial terms and ratios in our online Contextuary—our illustrated glossary of finance, and of course there is our Visual Finance web app.

Let us know how we can help your team make better business decisions!

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