Be Sure to Plan for the ‘Outlier’
Prepare Plan A for likely economic conditions, and Plan B for unforeseen circumstances.
Predicting the future is a tricky business. In hindsight, however, everything seems so inevitable.
Economists, for example, shouldn’t have missed the ominous signs of a housing bubble a few years ago. And it’s mystifying to find out how the Federal Reserve never knew how intertwined large banks were, resulting in too many “too big to fail” episodes. And we all were stunned when Kim Kardashian’s wedding lasted mere months.
Looking ahead to 2013, the experts are nearly united in their expectations of anemic growth, high unemployment, and the fact that “Dancing With the Stars” is about as exciting as watching a tree grow its annual ring.
Economists’ predictions represent the most likely scenario—one that’s highly likely to be...wrong.
The problem isn’t the economic models. These marvels of computational prowess digest huge amounts of data, analyze trends, and then spit out predictions like the National Hurricane Center during a storm. For all of their robustness, though, they can’t take every consideration into account, and this is where they fail.
At a recent economic session presented by our local federal home loan bank, I heard an economist talk about how this indicator and that indicator pointed to a slow, but positive trend during the next few years. I wondered, however, how a profession that basically was blindsided just a few years ago could be so confident today.
Their answer: If they said, “We haven’t a clue,” they’d join the unemployed.
The best explanation for why economists miss economic events is that they can’t plan for the “outlier.”
These are rare events that come out of nowhere, but have the power to dramatically change the status quo. It’s like being Rupert Sanders and showing up for Kristen Stewart’s wedding. Indeed, these seemingly random events occur often—undermining the business plans and strategies of companies worldwide.
So how can you plan for the unforeseen? Perhaps a story will help.
In late 2010, I was on a search and rescue mission to find a lost hunter. When one of our dog teams found him, he was in bad shape. The incident commander, sensing the urgency, immediately called for a helicopter extract from the Coast Guard. He also sent two large extraction teams with equipment into the woods to retrieve the hunter.
At the time it seemed illogical. After all, it would take ground searches almost two hours to reach the victim, while the helicopter would be there in 20 minutes. Alas, the ground teams proved crucial as the helicopter had to turn back due to mechanical issues when only minutes away.
I asked the commander about how he made his decisions. His response: “I make two plans. Plan A, for how things should happen and Plan B, for how they probably will happen.”
So, if low growth is the economists’ Plan A, what should Plan B cover? The most likely outliers:
The economy recovers: In this case, loan demand surges, deposits decrease, and interest rates begin to increase. It’s the “everywhere it’s sunny” environment of 2006, all over again. This time, though, net interest margin gets thinner than Angelina Jolie’s wrist.
- The fiscal cliff happens: In this case, taxes go up, spending goes down, and the economy tanks. The President (as I write this I don’t know who it is, but I’m guessing it’s not Ron Paul), blames Congress while Congress blames everyone else. Loan demand collapses.
Of course, using my logic, anything I plan won’t happen.
So let me leave you then, with one last prediction: The Seattle Seahawks will not win the Super Bowl.