Friday, October 29, 2010

Where does the future start?

When forecasting or planning for the future, is our vision irreparably blurred or skewed by the present?

This morning I read the beginning of Keynes' 1919 book The Economic Consequences of the Peace. Keynes wrote this book because he was unsatisfied with the resolution of the first world war - he felt that the political and economic decisions made in the wake of the war were so one-sided and unfair that they would result in Germany rising up in anger once again.

He was right too.

But what struck me was Keynes’ observation of human nature – that we expect the status quo to go on forever.

I found the opening lines quite moving - it made me question what the future holds for Australia. It seems like Australians are happy to chug along in their lives, satisfied that the economy will continue to turnover at a great rate. This national resolution to relax and wait for the commodity royalties to trickle though the economy has won us plenty of attention throughout the world, but how long can the commodities be relied on?

The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.

Are we basing our plans for the future on sandy and false foundations? Are we too caught up in the present to realise how fleeting the present really is...was?

Thinking about it in modeling/forecasting terms, it appears that our estimates of the future rely too heavily on our most recent experiences. While we understand that the logical starting point for the future is the present, we may fail to recognise if the present is an outlier (not along the long-term trend line). If the present is an outlier, then it is not a good base for a forecast.

But is this the myopic nature of the human race? I find it somewhat ironic that our minds have sufficient power to know that we have to plan for the future, but they are not powerful enough to net out the effects of our current situation in order to make our future plans more realistic.

This bias for the present affects everything that we are; our mood as walk down the street, our ability to perform at work (or elsewhere) and our plans for the future (it can even affect our memories of the past). Everything that we do, see and perceive is affected by our present or our immediate past.

I wonder how I can best net out my current perceptions in order to better understand the future?

More importantly, how do I start planning for the future if the future doesn’t necessarily start with the present?

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